2. CSF01-02-0135 Business Uses of Life Insurance

3. CSF01-02-0135 Traditional Applications u Key Person Life Insurance u Collateral Life Insurance u Buy/Sell Agreements u Business Succession

4. CSF01-02-0135 KEYPERSON INSURANCE PROTECTION

5. CSF01-02-0135 The success of a business u The right strategy u The right product / service u The right market u The right price u The right people!

6. CSF01-02-0135 Key employees u Who are “key employees”?

7. CSF01-02-0135 Key employees u Key decision makers u Financial and operations management u Research u Technology u Marketing u Sales u etc.

8. CSF01-02-0135 Key employees u The owner-manager u Other employees who have a financial impact on the future of the business

9. CSF01-02-0135 The problem u Premature death of the owner-manager or other key employee: u Bankers may call loans u Suppliers may not extend credit u Customers may not return u Employees may seek more secure employment Without a source of working capital, the business may not survive!

10. CSF01-02-0135 Power phrases “Could your business survive your death?” “The day after your death, who will step in to run the business? Your spouse? Children?” “You insure your premises and equipment, but have you thought about insuring your most important assets -- your people ?”

11. CSF01-02-0135 Fact-finding u Are you able to take regular vacations away from the business? u Are other family members involved in the business? u Who are the key employees of the business? Are they insured?

12. CSF01-02-0135 Profile u Private corporation, closely held u Owner-manager and / or other key employees who have a financial impact on the business, age 30 - 50, healthy u Cash flow

13. CSF01-02-0135 Key person insurance protection u Type of policy u Owner u Life insured u Beneficiary u Premium payer u Premiums are not tax deductible u Death benefit is tax-free u Credit to CDA

14. CSF01-02-0135 The problem u The business will need cash to u Meet immediate working capital needs u Repay short-term loans u Hire interim management u Find, attract, hire and train a replacement But, where will the cash come from?

15. CSF01-02-0135 The solution u Business earnings? u The bank? u Family? u Friends? u Investors? u LIFE INSURANCE!

16. CSF01-02-0135 Key Person An Example Male Age 45, Non-Smoker Death Benefit$2,000,000 Plan Type10 Year Term Renewable to Age 75 Convertible to Age 65 Annual Premiums Years 1-10$3,790 10-20$12,890 20-30$35,650

17. CSF01-02-0135 BUSINESS LOAN PROTECTION (collateral insurance)

18. CSF01-02-0135 Corporate finance u Need for funds: u Working capital (inventory, receivables) u Investment u New equipment u New business property u Re-finance existing debt u Redeem shares u Dividends

19. CSF01-02-0135 Corporate finance u Funding sources: u Issue new shares u Re-invest retained earnings u Borrow u Shareholder loans u Line of credit u Equipment lease u Bank loans u Mortgages Your friendly banker?

20. CSF01-02-0135 Corporate finance u Terms and conditions u Collateral security u Personal guarantees u Repayment?

21. CSF01-02-0135 The problem u In the event of the premature death of the owner-manager, business debts can threaten the future of the business u Cash flow and profits may be affected u The banker may call the loan u The banker may not extend further credit u Where will the funds come from? u Can the business survive?

22. CSF01-02-0135 The solution u Another bank? u Family members? u Friends? u Colombian cartel? u LIFE INSURANCE!

23. CSF01-02-0135 Collateral insurance u Two situations where life insurance premiums are tax-deductible: u Charitable gifting u Collateral insurance

24. CSF01-02-0135 Collateral insurance u History u Interpretation Bulletin IT-309R u Administrative relief u The Queen v. Antoine Guertin Ltee u New subparagraph 20(1)(e.2) u Revised IT-309R2 u Revised IT-430R3

25. CSF01-02-0135 Collateral insurance 20(1)(e.2) Deductions: Premiums on life insurance used as collateral Such portion of the lesser of (i) the premiums payable by the taxpayer under a life insurance policy (other than an annuity contract) in respect of the year, where (A) an interest in the policy is assigned to a restricted financial institution in the course of a borrowing from the institution, (B) the interest payable in respect of the borrowing is or would, but for subsections 18(2) and (3.1) and sections 21 and 28, be deductible in computing the taxpayer’s income for the year, and (C) the assignment referred to in clause (A) is required by the institution as collateral for the borrowing and (ii)the net cost of pure insurance in respect of the year, as determined in accordance with the regulations, in respect of the interest in the policy referred to in Clause (i)(A) as can reasonably be considered to relate to the amount owing from time to time during the year by the taxpayer to the institution under the borrowing

26. CSF01-02-0135 Collateral insurance u Key points for deductibility u Loan interest must be deductible i.e., loan must be used for the purpose of gaining or producing income from a business or property u Lender is a bank, trust company, etc. u Collateral assignment is a loan condition u Lesser premiums paid and NCPI u Deduction must be reasonable u Borrower and policyowner must be the same

27. CSF01-02-0135 Collateral insurance u Type of policy u Owner u Life insured u Beneficiary u Premium payer u Death benefit is tax-free u Credit to CDA

28. CSF01-02-0135 Collateral insurance u cost u renewable cost u renewal privilege u control u portability u credit to CDA u personal attention u expertise u ability to convert the coverage u death benefit amount u Creditors life insurance Vs individual insurance:

29. CSF01-02-0135 Profile u Private corporation, closely held u Owner-manager age 30 - 50, healthy u Owner-manager has a family u New business or expansion phase u Cash flow

30. CSF01-02-0135 Fact-finding u Are there any debts currently owing by the company? Personal debts used for business purposes? Are they insured? u Do you anticipate incurring any debts in the near future (within 2 years)? u Do you have any short-to-medium term plans for expanding the business?

31. CSF01-02-0135 BUY-SELL AGREEMENTS

32. CSF01-02-0135 BUY-SELL AGREEMENTS What happens to the shares of a deceased shareholder if there were no prior arrangements?

33. CSF01-02-0135 BUY-SELL AGREEMENTS Shares go to the deceased’s estate who then becomes a “partner” in the business!

34. CSF01-02-0135 BUY-SELL AGREEMENTS Typically, the estate would prefer having cash and the surviving shareholder, control of the company.

35. CSF01-02-0135 BUY-SELL AGREEMENTS The solution: Pre-funding a buy-sell agreement with a life insurance policy!

36. INTEGRATED PLANNING FinancialPlanning Life Style Planning EstatePlanning BusinessPlanning

37. The professional team... IntegratedPlan Tax + Legal Advisors Investment Advisor Other Advisors Insurance Advisor

38. CSF01-02-0135 What have you got to offer... createpreserve u The ability to create and preserve wealth u Life insurance products u Savings and investment products u Retirement income products u Etc. u Experienceexpertise u Experience and expertise best products u Access to the best products best resources u Access to the best resources

39. CSF01-02-0135 Business Succession u 70% of family-owned enterprises do not survive to the 2nd generation u 90% do not survive to the third Going Out of Business Sale

40. CSF01-02-0135 Family Business Survey u 53% of owners have a written estate plan SUCCESSION PLAN u Only 28% had a SUCCESSION PLAN u Only 57% intended to transfer the business to a family member Source: The Family Business Advisor

41. CSF01-02-0135 Family Business Survey u Over 50% had most of their wealth tied up in the business u Most owners had no plans to retire “I’ll work till I drop” u 71% of those over 65 had no plans to retire Source: The Family Business Advisor

42. CSF01-02-0135 Business Succession u Business survival kit u The right product or service u The right marketing u The right financial plan u The right people u The right succession plan

43. CSF01-02-0135 Business Succession u Four alternatives to choose from: u Personally retain ownership u Pass ownership to the heirs u Sell the ownership u Liquidate and walk away

44. CSF01-02-0135 Business Succession u Factors to consider u What should happen to the business in the event of premature death of one or both parents? u What should happen to the business if one or both parents suffer a long-term disability? u What should happen to the business if one or both parents decide to retire? u Do your current plans reflect your wishes?

45. CSF01-02-0135 Business Succession u Factors to consider u What do the children have to offer in terms of ability / interest / age? u Is there a natural “heir apparent”? Are there other children not active in the business? u What do the key employees have to offer in terms of ability / interest / financial resources?

46. CSF01-02-0135 Business Succession u Factors to consider u What is the medium- to long-term potential for the business? u Is there a ready market for the parents’ ownership interest in the business? u What is the relative importance of the business to the overall financial plans of the parents?

47. CSF01-02-0135 Business Succession u Excuses u Unaware there is a problem u Want to avoid conflict u Want to avoid cost u Will live forever u Too busy

48. CSF01-02-0135 Business Succession u Consequences u Family feuds u Lack of family business direction u Possible family successors driven away u Possible business failure or forced sale outside the family

49. CSF01-02-0135 Business Succession The role of life insurance: to help ensure the business succession plans can be fully implemented at the time of maturity. How? u Funding the buy-sell agreement u Providing working capital to the business u Paying off business debts u Providing personal estate liquidity for income taxes, final expenses, estate equalization, bequests, etc.

50. CSF01-02-0135 Other Business Planning Opportunities u Executive Compensation u Retirement Compensation Agreement u Insured Retirement Program

51. CSF01-02-0135 Investment Security Bond u What happens when someone must use their savings to live because of a Critical Illness? u Savings diminish u inheritance could disappear u money can run out!

52. CSF01-02-0135 Investment Security Bond u Critical Illness insurance allows for the security of your client’s investment objective while providing funds to either live or receive medical treatment.

53. CSF01-02-0135 Investment Security Bond u Power Phrases u “Tell me how long your savings would last if you became critically ill?” u “Are you willing to dramatically affect your savings because of the costs of a critical illness?”

54. CSF01-02-0135 Thank You!