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BROKER WORLD MAGAZINE

Leverage Life Insurance


To Help Clients
CHARLES
CHUCK
VAN
DEVANDER
serves as senior vice president,
advanced marketing and concep
tual product strategies for AIG
Succeed In Business
Succession Planning
Global Consumer Insurance, the
consumer insurance business of
American International Group,
Inc. (AIG). In this role, he is
responsible for creating product

I
concepts to drive sales growth ve met quite a few brokers who are These businesses may have a retiring
and educate the organizations focusing more on using life insurance in partner who wants to transition out, or
distribution partners on these business succession planning. The market an owner who is interested in retiring and
solutions. seems to be theirs to mine, given that there leaving the company to one or more chil-
Van Devander joined AIG are more than 28 million small businesses dren. Unfortunately, without an exit plan,
Global Consumer Insurance in in the United States1 and statistics show only 30 percent of family-owned businesses
June 2013 and brought nearly that at any given time, 40 percent of them survive transfer to the second generation,
20 years of insurance industry are facing a transfer of ownership issue.2 12 percent to the third generation, and only
Consider that while 96 percent of business about 3 percent to the fourth generation.6
experience.
owners recently surveyed agreed that hav- Thoughtful business succession plan-
Van Devander can be reached ing an exit strategy was important for their ning, therefore, is crucial if the tide is to
at AIG Global Consumer Insur future, as well as for the continuation of the turn, enabling more small business owners
ance, by email at Chuck.Van business beyond their leadership, fewer than to retire with the satisfaction of knowing
Devander@AGLife.com. 23 percent of respondents claimed to have a their company has an opportunity to
written business exit plan.3 As a CNBC news endure, and furthermore, that they are
story explained, Many entrepreneurs who financially prepared for the future.
have spent years building successful busi- However, for some small business owners
nesses would rather have a root canal than whom I have met, their retirement plan is
undertake the often-painstaking process of their business, because as they have grown
succession planning.4 the company they have focused on putting
Furthermore, of the relatively few business money back into it and thus havent had a
owners who do have a business succession lot of dollars to put elsewhere. Without a
plan, how many do you think actually have sufficiently funded transition plan, these
the wherewithal to fund it? If you answered, owners may not have the opportunity to
Not many, I have a feeling youre right. retire or to retire comfortably. The person
Who are these business owners? may talk about transitioning the firm to a
According to the most recent figures released business partner after death, but then desire
by the Small Business Administration, 66.1 to turn over the business prior to death.
percent of business owners are baby boom- I believe it would behoove small busi-
ers.5 Some obvious examples of the types nesses, the families of those who own
of businesses they may own are law firms, them, and our industry to do more to
CPA firms, insurance agencies and doctor/ educate about the role that life insurance
dental offices. Family-owned businesses can serveincluding if the policyholder
that may also need an exit plan include becomes chronically ill, disabled or expe-
For more information, visit
car dealerships, HVAC companies, car riences another major medical condition.
www.RetireStronger.com. repair garages and construction companies, Historically, however, the discussion about
among others. life insurance in exit planning has focused

Reprinted from BROKER WORLD October 2014 www.brokerworldmag.com


Used with permission from Insurance Publications Subscriptions $6/yr. 1-800-762-3387
AGLC108217

005Oct14F Van Devander_3 copy.indd 1 10/27/14 2:49 PM


BROKER WORLD MAGAZINE

more on what might happen if the business

A
owner dies.

decade ago, a broker helping with an


Solutions exist for other contingencies.
Too few small business owners seem to
realize that product innovation has made it
possible for one policy to provide cash for exit plan might have been thinking
a buyout in the event of death or chronic
illness, as well as create cash payments at primarily about the death benefit of a life
a certain age if neither death nor chronic
illness occur. For example, a particular
insurance policy.
guaranteed universal life insurance policy,
when properly structured and funded, can
provide:
access to cash value to help buy out a
partner upon that persons death, identifies the timing of the transition, the the exit planning process, as the current
access to an accelerated portion of the value of the business, what the purchase value of the company and future growth
death benefit to help fund a business buy- price will be, and any triggering events. expectations must be determined. The team
out or pay for other needs (when certain For example, perhaps the plan will stip- should re-evaluate the plan every two to
health impairment criteria of an attached ulate that an employee will buy out the four years to assess whether the same buyer
chronic illness rider are met), or owner in 10 years unless the owner dies and seller are in place, and whether the face
guaranteed monthly withdrawal ben- before that time. Depending on the age of value of the life insurance policy is still suf-
efits after as few as 15 years, regardless of the current owner, it may be appropriate for ficient, based on the growth of the business.
the cash surrender value within the policy him to fund, with the successor, a guaran- Its refreshing to see more thoughtful
(based on an attached longevity rider). teed universal life policy with a longevity evaluation beginning to go into the exit
To help a small business owner with exit rider that can produce a future monthly planning process, and more emphasis on
planning, Ive found it useful to ask a series income stream to serve as installment pay- the need to plan for the multiple potential
of questions. First, has the owner identified ments toward the buyout of the business. triggering events of a business succession.
someone to transition the business to, such If, however, the owner will want to A decade ago, a broker helping with an exit
as a partner or an adult child? If not, as a transfer the business sooner than a monthly plan might have been thinking primarily
broker or an advisor, you may have the income stream from the rider could be about the death benefit of a life insurance
opportunity to help the owner implement activated, it may be appropriate to utilize a policy.
strategies designed to secure a successor. product designed to accumulate cashfor Today, I believe were witnessing a trend
Consider that the sale and value of a example, a variable universal life (VUL) that, although still in its infancy, focuses
small business may be impacted by whether policy or an indexed universal life (IUL) on leveraging life insurance with smartly
key employees will stay with the company.7 policy. With either, the goal would be to find structured riders to address other contin-
It may be prudent for the current owner a way for the current owner and the poten- gencies in succession planning, such as
to establish a retention plan by funding tial successor to fund the policy together in retirement, longevity and chronic illness.
for each of themif they agree to remain such a way that when the current owner Lets hope the trend builds.
with the business for a specified number of reaches retirement age, sufficient cash value Footnotes:
yearsa permanent life insurance policy would exist in the policy for the successor to 1. United States Small Business Profile, Small
with a robust cash accumulation feature. buy the owner out through an installment Business Administration, 2014, accesed August 29,
A strategy such as this may be a powerful agreement mandating a substantial down 2014 at http://www.sba.gov/sites/default/files/files/
incentive for valued employees to stay. payment as well as (for example) annual UnitedStates13(1).pdf
2. Boomer Generation Business Owners, Michael
Whether or not the business owner has payments for a set number of years. P. Roy, Business Exit Timing, December 2011,
identified a potential successor, the next The tax ramifications of a business buy- accessed August 29, 2014 at http://www.betiming
question is: When do you want to get out out funded through life insurance vary .com/6-steps-exit-planning/exit-planning-for-boomer-
of the business, and do you want to get depending on multiple factors, including business-owners
3.Ibid.
fully outor partially out? Sometimes the type of company involved. One key 4. Most small business owners arent planning ahead:
the owner wants to slow down but stay benefit for the potential successor who has Poll, Anna Robaton, CNBC, June 22, 2014, accessed
involved. If he wants out altogether, the helped fund the policy is that the funds he August 29, 2014 at http://www.cnbc.com/id/101769793
question becomes whether the prospective may access for the down payment, either 5. 2007 Survey of Business Owners Summaries of
successor has the financial wherewithal to through a loan against the cash value of the Findings, Small Business Administration, last revised
November 2012, accessed August 29, 2014 at http://
buy out the owner. policy or as a living benefit, are generally www.census.gov/econ/sbo/getsof.html?07cbo
All too often, in my experience, the considered income tax-free. Be sure to tell 6.Ibid.
answer is noso its important to help clients at the outset of the planning process 7. Is One Key Employee Worth $500,000 When
the owner find a way for the prospective to seek independent tax or legal advice Selling Your Business? Todd Taskey, Business
Management Daily, February 4, 2010, accessed August
successor to buy the business. Youll want when considering their own circumstances. 29, 2014 at http://www.businessmanagementdaily.
to assist with establishing a business suc- Additionally, ensure that a CPA and a com/20683/is-one-key-employee-worth-500000-when-
cession plan, a buy/sell agreement that business valuation expert are involved in selling-your-business

Reprinted from BROKER WORLD October 2014 www.brokerworldmag.com


Used with permission from Insurance Publications Subscriptions $6/yr. 1-800-762-3387

005Oct14F Van Devander_3 copy.indd 2 10/27/14 2:49 PM