Business Owner with a Family and Net Worth of $5 Million This is the story probl

Question

Business Owner with a Family and Net Worth of $5 Million

This is the story problem. Please look at the question at the very end of the story

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You have been recommended by an attorney to work with his clients to assist with their insurance needs for their business. The business, ABC Company, is owned equally by two partners, Jim, age 56 and Fred, age 42. The business is valued at $5 million and is organized as a Subchapter S Corporation. Each partner receives $1M annually in wages and Subchapter S dividends.

Each partner is contributing the maximum to the Company 401(k) plan annually. When you meet with them, you learn that they have no buy-sell agreement and no insurance. They tell you that they want to protect their families in the event of a death of a partner, and that they also want to be able to establish a retirement savings program for each of them individually outside of the Company 401(k) program. Each partner is married with children. They each have a net worth of $5 Million, including their ownership share of the Company.

They ask you to make recommendations to them to develop a plan of insurance for their personal and business needs. Please provide your recommendations, and make assumptions on which you will make your recommendation. You should discuss the types of insurance policies you would recommend and why you recommend them. Please keep your discussion to no more that 3 typewritten pages, double-spaced.

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In class we discussed Term Life Insurance, Variable Insurance, Universal Insurance, and Second-to-Die Insurance. Please help me narrow down this paper with any strategies that these gentleman can take.

Thank you

Explanation / Answer

Term life insurance or term assurance is life insurance that provides coverage at a fixed rate of payments for a limited period of time, the relevant term. After that period expires, coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments or conditions. If the life insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis over a specific period of time.

Variable Insurance is a form of permanent life insurance, Variable life insurance provides permanent protection to the beneficiary upon the death of the policy holder. This type of insurance is generally the most expensive type of cash-value insurance because it allows you to allocate a portion of your premium dollars to a separate account comprised of various instruments and investment funds within the insurance company's portfolio such stocks, bonds, equity funds, money market funds and bond funds. In addition, because of investment risks, variable policies are considered securities contracts and are regulated under the federal securities laws; therefore, they must be sold with a prospectus.

Universal life insurance (often shortened to UL) is a type of permanent life insurance, primarily in the United States of America. Under the terms of the policy, the excess of premium payments above the current cost of insurance is credited to the cash value of the policy. The cash value is credited each month with interest, and the policy is debited each month by a cost of insurance (COI) charge, as well as any other policy charges and fees which are drawn from the cash value, even if no premium payment is made that month. Interest credited to the account is determined by the insurer, but has a contractual minimum rate (often 2%). When an earnings rate is pegged to a financial index such as a stock, bond or other interest rate index, the policy is an "Indexed Universal Life" contract. These types of policies offer the advantage of guaranteed level premiums throughout the insured's lifetime at substantially lower premium cost than an equivalent whole life policy. This not only allows for easy comparison of costs between carriers, but also works well in irrevocable life insurance trusts (ILIT's) since cash is of no consequence.

Second to die life insurance, also known as survivorship life insurance, is an interesting and affordable policy option that you may want to consider for estate planning purposes. A second to die life insurance policy is set up to insure two individuals, usually married couples, and does not pay out until the surviving spouse dies. This means that if you and your spouse take out the policy, neither of you will collect a death benefit payout when the other spouse dies, but life insurance will be paid after your death to your beneficiaries, which can be heirs, a charity or trust that you set up. Since second-to-die insurance is one policy that covers two individuals, it’s usually cheaper than two individual life policies.

For the current scenario Universal Life Insurance is suggestable as it promises a return and also cost effective. Second to die Life Insurance and Term life insurance is also preferable. Variable Life insurance is highly flectualting one which invovles higher level of risk. So according to me Universal Life Insurance is advisable

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