I considered naming this entry as Finishing Touches on Term Life Insurance. However, since we will be considering other forms of Life Insurance to fund your Buy-Sell agreement we will be comparing Term Life to the other types. So in essence we will be touching upon the concept of Term Life Insurance, in part, to several other forms.
Term Life Insurance is not all alike. For example, there are differences in premiums for the same coverage. You may in fact have seen advertisements on television for Term Life. On the surface, you might be inclined to say “I should go with them as they by-pass a salesperson.” This is not so. I have a client today that is thankful for asking me about an add she received from a college loan company. In short, the company was offering Term Life Insurance WTIHOUT A MEDICAL EXAM. I read the fine print and was able to show my client how my program could not only DOUBLE THE COVERAGE but also save her a few extra dollars each year, even though she had to submit medical records. So be careful when comparing with companies who have agents who are not properly trained on the important provisions of Life Insurance polcies. I think it goes without saying that one should always use a source that is independent.
Another factor is control of your policy. There are many instances where provisions in Term Life policies for a Buy-Sell that offer the policy owner several degrees of control. One provision is a reentry option. This means that within a period prior to the end of you Term plan, you can reapply for the same term period at higher costs that may in fact be lower than if you were to go out and purchase other Insurance from a different company. Thus, the level of control can be very useful for you. This is very important within a Buy-Sell plan because you want every dollar to be invested in the most cost efficient way.
A further consideration should be Riders on your Term Life Insurance policies. I would hazard a guess that many companies and agents never suggest the Disability Waiver provision. This means that should you become disabled during the term of your Term Life policy, the company will waive all premium payments during the disability. Again within a Buy-Sell agreement, this could save your company hundreds and maybe thousands of dollars. A while ago, I encouraged a client to put this rider on his policy. After the policy was issued, he had a minor stroke that kept him out of work for a substantial period of time. He is still thanking me for the recommendation.
You should furthermore investigate other policies even if you are currently insured. Over the past several years, the cost of Term Insurance has dropped dramatically. You can change or rollover your policies. It is called a 1035 exchange. This could lower your premium outlay and help your cash flow within your business operations. Make sure you do the important paperwork when transferring a policy as you don’t want the coverage to lapse at the wrong time.
Lastly, the beneficiary designations need to be carefully monitored. A good example would be to review if your Term Life policy complies with Section 101 (j). If your business were in any way tied to the Life Insurance policy (Buy-Sell agreement) then if there were a claim, the proceeds could be fully taxable as ordinary income to the beneficiary.
So please take careful considerations of these issues with your Term Life policies. The few extra minutes you take could end up saving you thousands of dollars.