What’s special about personal insurance is that it can be used to generate the money needed to meet a specific objective as well as all the needs of a family or business, in the event of a health problem or premature death.
As with the composition of an investment portfolio, the weighting of the various insurance products in the risk management portfolio is determined a priori on the basis of liquidity needs at various stages of life.
Let’s take the example of an entrepreneur, Mrs S, aged 48, married and the mother of two young teenagers, who owns, with two partners, an innovative company in the IT sector.
Mrs. S. holds 55% of the shares of XYZ Inc. through a management company. The market value of her shareholding can soar at any time as a result of product and market developments. Conversely, this market value may also come under downward pressure due to a lack of resources or liquidity, or because of financing and regulatory issues.
Mrs S.’s first concern is to ensure that her debts are wiped off her estate balance sheet. This mainly concerns the mortgage on the main residence and the country house, so that her husband and children will not have to sell the properties.
She also wants to set up an emergency fund and a supplementary education fund, and to leave her husband her capital and registered assets tax-free.
The shares in her management company will go to a spousal trust, with her children receiving the capital and her husband receiving the income.
At first sight, by taking out a term sum insured of $1.15m to cover liabilities on death, the first objective has been achieved.
This ensures the financial security of Mrs S.’s family, provided that the survivor’s income is sufficient to maintain a similar lifestyle by supporting the properties and continuing to save for retirement.
The income from the spousal trust is vaguely defined and is based on the value and liquidity of the assets in the trust.
Similarly, Mrs. S. knows that the $1.5 million in commercial loans taken out by XYZ Inc. will be reimbursed upon her death by an insurance policy required by the lenders. Her partners will be able to invest in the company’s development without having to refinance the projects if Mrs S. dies prematurely. This objective is achieved by paying the business debts on death.
However, in order to keep the business running smoothly, new resources will have to be found to maintain the smooth running of the business and development beyond the one-off payment of debts.
Although paying off debts will reduce costs, the survivor’s income of $175,000 may not be enough to maintain the family’s lifestyle, given the loss of Mrs. S.’s annual income of $225,000.
Given the children’s ages, 11 and 13, and disregarding potential income from the spousal trust, additional capital of approximately $1.3 million would be required to replace 75% of Mrs. S.’s income by the time the youngest reaches age 25, assuming an annual inflation rate of 2% and a projected return of 4%, at a tax rate of 50%.
His or her spouse would have more scope to continue saving for his or her own retirement while maintaining the family’s lifestyle.
At the same time, payment of the business loans on death will ease the company’s debt burden, but will not offset the loss of earnings caused by the death of the president. Protection of $1 million, or about five times Mrs. S.’s income, would allow the survivors to quickly hire a new manager or set up a reserve fund to deal with the likely slowdown in business.
After 15 years of hard work, XYZ Inc. is profitable and promising. Current profits, goodwill and ongoing contracts have boosted the value of the shares. Mrs S. hopes that her children will one day reap the rewards of her work.
However, given the current results, it seems appropriate to fund the shareholders’ agreement today, so that the family can cash in on the fair market value of the shares in the spousal trust.
Insurance on the lives of the three partners for a total of $5 million will give Mrs S. peace of mind, knowing that her children will inherit even if she dies prematurely. And if this misfortune were to occur while the company was going through a more difficult period, the life insurance benefit would secure the redemption of the shares.
Mrs S. will be able to take out the required cover with varying durations within her management company and designate beneficiaries accordingly.
Some of this protection may be permanent, depending on the estate’s longer-term intentions.
Whatever the end, there are many ways to achieve it. Risk selection remains the cornerstone of the life insurance financing strategy.
If you have any questions, please do not hesitate to contact him : Francis Paquin email@example.com 450-543-4082