Life Insurance Keeps a Business in the Family

By Trilogy Financial
October 9, 2023
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In the heart of a bustling town, Ernesto “Peanut” Folks stood as the owner of an auto body repair shop, where years of hard work and dedication had woven into the very fabric of his business. His vision for the future was crystal clear—passing the torch and the legacy of his shop to his son, Ernesto. This is the remarkable story of how life insurance, often overlooked, can emerge as a beacon of hope and resilience when we need it most.

Ernesto “Peanut” Folks was the proud owner of an auto body repair shop, and his plan was to one day pass along the business to his son, Ernesto. Life insurance was never on Peanut’s radar until an insurance professional spoke to him about how it could help him protect the business and its 10 employees.

Downturns in the business would sometimes make it hard for Peanut to make his premium payment. He considered dropping the policy but ultimately kept it in place.

When Peanut was diagnosed with advanced-stage lung cancer, his doctors gave him just six months to live. The treatments that followed kept him away from work, and medical bills mounted.

Given his terminal diagnosis, a provision in his life insurance policy called an accelerated death benefit allowed him to access a portion of the money from that policy while he was still alive. In the months before his death at age 49, Peanut was able to pay off his debts and turn the body shop over to Ernesto, fulfilling his dream.

Talk to an insurance professional about how life insurance can protect your business and your legacy.

Download this comprehensive blog as a concise one-page here: Life Insurance Keeps a Business in the Family

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By
Rebecca DeSoto, CDFA®
September 18, 2017

Generally, people purchase life insurance because they have a spouse or child they want to protect financially in case they pass away. But, there are several other reasons to buy life insurance that can benefit more than just those who need to protect their family. One of those benefits is accumulating tax-deferred, tax-free, cash value.  Just like a Roth IRA, the cash value in a permanent life insurance policy can grow on a tax-deferred status and be accessed tax-free, but without the consequence of incurring a 10% penalty if accessed before attaining age 59.5. “Living Benefits”, also known as “Accelerated Benefit Riders” are another advantage of life insurance other than the death benefit. As the name suggests, “living benefits” can be utilized in certain circumstances by the policy holder without passing away.

Common living benefits allow the policy holder to access all or some of the death benefit of their policy to help provide managed care if they are diagnosed with a critical or chronic illness. ABRs originated in the 80s and 90s when companies called “viaticals” found a market for purchasing life insurance policies from people that were very sick who realized they needed money now to help pay their medical bills more than their beneficiaries needed the death benefit. The insurance industry realized what was happening and started adapting policies to include Accelerated Benefit Riders to help their consumers get access to expensive medical care, outside of what health care would cover, while they were sick.

Living Benefits that are common today are terminal, chronic and critical illness or critical injury riders. It is important to talk to your advisor and read the fine print when considering different insurance policies because riders can differ significantly between insurance companies and policies. Terminal illness riders will allow the insured to accelerate a portion of their death benefit, tax-free if they are diagnosed with a terminal illness. Some companies require a diagnosis of 24 months or less to live while others require 12 months or less to live. A chronic illness rider is generally triggered when the insured has a long-term illness in which they are unable to perform two of the six “Activities of Daily Living” including eating, dressing, toileting, transferring, bathing, and maintaining continence. Some companies structure these riders to pay a large benefit upfront and some will provide a much smaller amount but spread over a long period of time. Lastly, critical illness/injury can include many things – heart attacks, stroke, cancer, brain trauma, severe burns etc. and the amount of benefit that is paid out depends on how critical the injury/illness is and how much it will affect the insured’s life span.

Because medicine and medical technology have advanced so rapidly, people are living much longer lives than they used to live. The US Census Bureau reports that at least 70% of people over age 65 will require some long-term care at some point in their lives . In 2014, the annual rate for a skilled nursing facility was $95,707 .  Because traditional, stand-alone Long-Term Care policies can be incredibly expensive, utilizing life insurance can be a great way to build assets throughout your income-earning years that are earmarked for advanced medical costs later on and can protect yourself and your loved ones from unknown health scares.

Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing. Guarantees are based on the claims paying ability of the issuing insurance company. Withdrawals from the policy may result in the reduction of the death benefit.

  1. US Census Bureau, American Community Survey 2013
  2. Univita Cost of Care Survey, Feb 2014
By
Jeff Motske, CFP®
February 25, 2019

Coming from sunny southern California, there’s nothing quite as nice as an aimless, leisurely drive down the coast. As delightful as that is, it’s not a metaphor for life. Life is complicated and moves fast. It’s easy to get sidetracked. That’s why when it comes to any of your goals, especially financial independence, a clear vision of what you’re working towards and a developed idea of the best way to get there will keep you in route to your goal. Many folks have a general idea of where they want to go. They want to be fiscally responsible, perhaps investing in a home and saving for retirement while still prepared for the financially unexpected. However, 1 in 3 Americans have less than $5,000 saved for retirement and only 16 percent of those surveyed had more than 15 percent of their income saved. We know that most people have good intentions. So why do their actions take them so far away from their goals?

It all comes down to that lack of a map – not having a well-defined goal and detailed route to get there. Yes, it’s good to know that you want to be fiscally responsible, but if you don’t have a detailed definition of what that means, how do you know when you’ve achieved it? What are you saving for? How much do you need to save for retirement and how much do you need in your emergency fund? What other financial goals do you have, and which ones take priority? Lacking those details may make it easier to get distracted by impulse purchases or detoured by a financial commitment that might not be the best for your budget or your long-term financial goals.

Once you have the destination, then you need to determine the most direct route to get there. Do you have a distinct budget for all your needs and your goals? Are you going to have a monthly amount deducted from your account to your savings goals? Have you considered the influences that work against your goals and what you might do to counter them? Having a distinct plan doesn’t mean that everything is settled. Circumstances may arise that distract or reprioritize your goals. Having a definitive plan, though, can help you recalibrate your course and prevent you from being shifted away from your goals long-term.

The road to your financial independence is oftentimes anything but direct. Between relationships, families, career, health and everything in between, it’s easy to lose sight of your goals. Yet, by thinking things through and creating a detailed plan, we can stay on course. Despite every fork in the road, every decision that tempts us away from our goals, we are able to remember what we’re saving for and the right steps we put in place to get there, which makes it easier to stay on course to our financial independence.

  1. https://www.cnbc.com/2018/08/27/1-in-3-americans-have-less-than-5000-dollars-saved-for-retirement.html
  2. https://www.cnbc.com/2018/03/15/bankrate-65-percent-of-americans-save-little-or-nothing.html

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