Maintaining Some Balance
Despite what you may think from the title, this is not a discussion about balancing work and your personal life or making sure to take time for you. No, today we are talking about your client's balance sheet, and a way to help them create an asset rather than a cost item when buying life insurance in the corporate setting.
The last time I checked, most of our business owner clients focus on paying as little as possible for any insurance policies they may need for key person or buy/sell agreement funding. As smart a strategy as this may be in some aspects of their business, if prompted, they will probably be able to think of an instance when paying the lowest price for something ended up costing them more in the long run. That may ultimately prove to be the case with their insurance purchase as well.
How? Consider a successful business, particularly a C corp, that has a reasonable amount of retained earnings. There are three key executives in the company, and they all have $1 million of key person coverage using term insurance. Each year they scratch out a premium check, and then the key person has the audacity to live! As good news as that is, the money spent on the insurance is gone, and the cycle repeats year after year.
Rather than continue to write that term insurance check every year, how about we take some of those retained earnings and move them from their current bank account into a life insurance policy? OK, great, but the surrender value is going to be far less than the premiums paid in the first year, right? Wrong! There are any number of permanent insurance products that have cash values as high as 95% of premiums paid in the first year. Did I mention that there are not only multiple products, but multiple product types (Whole Life, Equity Indexed UL, UL)? There are even opportunities for simplified underwriting if we have multiple lives to work with.
The fact that these products exist may not be a surprise to some of you, and there are probably a few who are saying that business owners will always go the term route. If you "already know" about these types of products or think you know how a particular client will respond to this, when was the last time you actually proposed one? Tough to make a sale without actually presenting the product and these products are being sold in very large numbers by your competition.
So what would this look like in real life? Well, if we use one of the key persons mentioned above, a 55-year old male, as an example and write a $1 million 10-year term contract, the total premium expense over ten years is $20,250 assuming he is a preferred risk. Using a high early cash value UL, we can drive the net cost at year ten down to $1,077. Sure it is going to take a large premium check each and every year, but the net cost in each year is lower and if that key person retired at age 65 there would be over $280K in the policy that would be available for other purposes.
The bottom line for the discussion today is this: it is impossible to sell a product if you don't present it. For the newer agent who has not been exposed to these products, let's talk. For the seasoned vets, you have so much of this product knowledge stored in your memory banks that it is tough to keep it all front and center. Hopefully this gentle reminder will help you do just that with this "balance sheet sale".