|Posted on 16 July, 2018 at 10:40||comments (1)|
A few years ago you decided to open a business. It’s been steadily growing since opening day and you’re finally making some money. Maybe you’ve even got a few staff. Things are looking up and the expectations are high for the upcoming year.
You go to the doctor for a checkup and he tells you that you’ve got cancer. There’s a good chance for survival but you must start treatment right away and you realistically won’t be able to work for at least half a year.
Your take a weekend canoe/camping trip with family and friends. You hurt your back, can’t do the required tasks of your job and it takes nine months for you to become healthy enough to work full time again.
What’s going to happen to your business?
Can the business sustain itself without you there?
You are in a partnership and one of the two above scenarios happens to your partner.
Can you handle the work-load by yourself while your partner is away?
Can you afford to hire someone to replace your partner in the meantime?
Your partner passes away.
Do you have a way to buy out their share of the business?
These may seem like unlikely events, but statistically they are not.
Currently in Canada about..
1 in 2 people will be diagnosed with cancer in their lifetime,
1 in 5 will have a heart attack,
1 in 9 will have a stroke.
There is also nearly a 50% chance that someone 40 years of age or younger will go on disability for more than 3 months during their lifetime. If that occurs, the average time on disability is anywhere between 2.5 & 3 years.
When this happens to someone owning a business the consequences can be detrimental and many businesses are ill-equipped to deal with a situation of this nature.
Is your business equipped to handle a situation of this nature?
Have you thought about how to prepare for such a situation?
Did you know there are strategies available to protect your business if something unexpected and unfortunate happened?
There are too many businesses in Canada that are not prepared financially to deal with the fall-out of any of the events above.
Here are a few solid strategies to protect your business from unexpected illnesses, injuries or deaths. A couple of these strategies can even help you build wealth now and for the future.
1) Disability Insurance & Business Overhead Expense Insurance
Disability Insurance protects you - the business owner - if you are unable to work due to an injury or an illness. It typically covers about 60% - 70% of your pre-tax income - tax-free, and will help you continue to cover expenses such as bills, groceries, and family needs. Often business owners are not actually taking much of an “income”, but insurance companies will work with you to ensure your personal needs can be met.
Business Overhead Expense Insurance protects your business. This is great for Sole Proprietors, as you are often responsible for earning much of the business’s profit. If you are unable to work, Business Overhead Expense Insurance covers the monthly expenses for your business - such as wages, office space, and supplies - so it can stay afloat while you are on the mend. Having Business Overhead Expense Insurance ensures that you do not need to dip into your savings or increase your debt load to maintain the business while you’re injured or ill.
2) Shared Ownership Critical Illness Policy
This is a great financial strategy for a business to protect the business owner, and to receive retained earnings tax-free in the future.
Personal Critical Illness policies pay a large lump sum of money when the insured person has a Critical Illness. The major four illnesses are Cancer, Heart Attack, Stroke, Coronary Artery Bypass, but about 25 illnesses are covered under these policies.
With a Shared Ownership Critical Illness Policy, the policy is jointly owned by the corporation and the business owner. Both parties share in the monthly premium payments, but the corporation pays the majority of it. Because you are both the corporation and the owner, this strategy allows you to benefit financially, no matter what the outcome.
The three possible outcomes to this strategy are:
If the owner is diagnosed with a Critical Illness, the corporation gets paid the large lump sum of money.
If the owner passes away, the corporation gets their premium payments paid back to them, in full.
If the owner stays healthy for a set period, say 15 years, the owner will receive all of paid premiums back – both the corporations share and their own – tax-free.
Using this strategy, you protect your business financially in the case you get ill, if you pass away your corporation does not lose a dime, and you’ve created an opportunity for yourself to receive your retained earnings as tax-free income in the future.
3) Dividend Paying Whole Life Insurance
A properly structured Dividend Paying Whole Life Insurance policy acts like a guaranteed tax-free GIC on steroids.
This is a great strategy for business owners to protect their families, to build a tax-free pension for themselves, and to finance their needs - personal or business - throughout their life without dealing with a bank.
How it works:
Once you’ve purchased this life insurance policy, your family is automatically guaranteed a death benefit. It is a permanent insurance policy, so if you pass away - no matter what age you are - your family or other loved ones are provided for financially. Your policy will also be earning interest and dividends, so your death benefit is guaranteed to grow every year.
In the meantime, cash values (savings) are also guaranteed to grow within your policy on daily basis, which can be used throughout your life for emergencies, business or investment opportunities, and anything in between.
Come retirement time these cash values can be withdrawn against your policy - tax-free. Your pension.
This can be structured so all premiums are paid through the corporation but you, the owner still have all the control.
4) Immediate Financing Agreements
Lots of business owners like the idea of, or at least know they should have life insurance but would rather put their earnings back into the business instead of using it to protect themselves.
An Immediate Financing Agreement allows you to purchase a life insurance policy but receive the entire annual premium back immediately to invest in your business at a low interest rate from the bank.
This is an awesome strategy for all business owners that qualify, as it ensures that you are insured and that your family and business are well protected. The insurance policy is creating a healthy tax-free pension for you in the form of cash value growth, which we spoke about under strategy 3. Every dime that you paid into the insurance policy as a premium payment, will also be immediately given back to you to use for, and grow your business.
5) Funding Buy-Sell Agreements.
Insurances - especially Disability Insurance and Life Insurance - can and should be used for buy-sell agreements for businesses with partnerships. Many businesses will have buy-sell agreements in place in preparation for unexpected situations, but do not actually prepare for how to fund these agreements.
If your partner passes away, do you have the cash to buy out their shares?
Do you have a plan in place to buy out your partner if they become disabled and can no longer function in their leadership role?
Purchasing Insurance policies on partners is a simple and wise way to fund buy-sell agreements.
Bob and Jane each own 50% of their business worth $500,000.
Bob buys a policy on Jane for $250,000, making himself the beneficiary. J
ane unfortunately passes away. Bob receives the $250,000 benefit to buy out Jane’s shares of the business and provide for her family.
This of course would also be done by Jane, in the case that Bob passes away.
Protect your Business
It is hard work to start a business, to make it sustainable, and then successful. It’s tough to watch people go through so much to create and sustain a business they love, only to see it disappear because they were unprepared for an unfortunate event like an injury or illness and didn’t have the cashflow to hold it together. And it happens all too often.
When we meet with clients and their families to build a healthy financial plan, one of the first things we tell them is that their greatest asset it not their house, or their business, or their car. It’s their HEALTH!
Without your health you are unable to work, to bring in an income and provide for yourself and loved ones around you. The foundation to any healthy financial plan should be insurances, because insurances protect what you already have and ensure that an income is always coming in, even if you can’t provide it.
It’s the same for your business. Protect what you have.
I love watching small local businesses pop up and grow. I also hate watching them fail. This is especially true when it could have been avoided by simply protecting the themselves and their business.
If you’d like to learn more about these strategies, we’d welcome the opportunity to sit down with you to discuss how you can protect yourself and your business, save some taxes and interest, and build a tax-free retirement income.