Life insurance has long been a tried-and-true tool for protecting businesses against economic losses that can occur when a key person leaves the business. As a tax-efficient funding mechanism, businesses also take advantage of life insurance to fund buy-sell agreements, providing immediate liquidity upon the death of an owner while accumulating cash surrender value for living buyouts. Businesses of all different shapes and sizes—from sole proprietorships to Fortune 500s finance various qualified and nonqualified compensation arrangements using specially designed life insurance.
But what happens if there is a fear that one or more of a business’s owners and/or key executives could be medically uninsurable or hard to insure? In the past, this meant that either life insurance was purchased on some lives and not on others or life insurance was not used at all, leaving a business with unfunded and potentially catastrophic liabilities. This is no longer the case. Cedar Point Financial Services LLC can advise companies on how multi-life programs may reduce or even eliminate medical underwriting and provide life insurance coverage for all their owners and executives.
If your business has at least 10 owners and/or W-2 employees, it could be eligible for a multi-life program. Offered by Cedar Point Financial Services LLC, multi-life programs allow life insurance coverage to be issued either on a guaranteed standard issue or simplified underwriting basis. If your group qualifies, you can say “goodbye” to the inconvenience of arranging doctors’ appointments for the participants as well as the inevitable delays that result from the medical underwriting process.
If your business meets these general guidelines, guaranteed or simplified life insurance coverage may be able to provide certainty to protecting your business:
- Minimum of 10 owner and/or W-2 employee participants
- Structured as an employer/employee relationship
- Actively at work
- W-2 or K-1 (not a 1099)
- U.S. citizen or permanent resident
- Underlying program design is based on a formula
- In addition, living benefits may be available for guaranteed standard issue and/or simplified underwritten policies, assuring funds are available when insureds are facing critical, chronic, or terminal illnesses.
Guaranteed Standard Issue
Businesses considering a multi-life program may elect to have life insurance issued on a guaranteed standard issue basis. As the name implies, these are life insurance policies that are guaranteed to be issued. That means regardless of health, participants cannot be declined or turned down. The application process is short with no medical questions asked. Participants must state that they have been actively at work for some period of time and answer a question about tobacco use, as a higher premium is assessed for tobacco users.
Then, policy amounts are typically determined by either a set amount based on a participant’s title, position, or percentage of ownership, or determined by a formula using a salary multiple, defined premium, or defined benefit. The higher the number of lives in a multi-life program, the higher the multiple used to calculate the maximum death benefit.
The result is that all participants are insured, and a business can feel confident that liquidity will be available to meet future buy-sell and/or key person concerns.
Here are three ways companies have used guaranteed issue life insurance:
- Carving out 15 executives to receive up to $1,500,000 of death benefit each
- Informally funding a Salary Continuation Plan for 30 managers with up to $1,300,000 of death benefit each
- Providing key person insurance coverage on 50 executives with up to $5,000,000 of death benefit each
Is guaranteed issue life insurance a fit for your business’s buy/sell or key person concerns? By creating a census of likely participants, Cedar Point Financial Services LLC can evaluate if guaranteed standard issue is available and can address coverage gaps while accelerating the underwriting process.
Another form of issuing life insurance in a multi-life program is by simplified underwriting. Simplified underwritten life insurance uses a simple or shorter form of underwriting. Participants must answer some questions about their health and lifestyle but do not have to take a medical exam or supply labs. Insurers will then use third-party sources to gather additional information about participants, such as their prescription drug history and driving record. Some insurers might follow up with a phone call to gather more information.
In exchange for providing more information on health and lifestyle, simplified underwritten policies generally have higher death benefits than guaranteed issue policies for the same number of lives. This can be a better fit for insuring obligations connected to executives with high salaries.
There are typically four or more questions asked to obtain simplified issue life insurance:
- Do you smoke?
- Do you currently reside in a hospital or long-term-care institution?
- Have you been declared terminally ill?
- Do you have AIDS or HIV?
By answering "Yes" to smoking, you may still be able to get a simplified underwritten life insurance policy, but as with guaranteed standard issue, it will be more expensive. If you answered "Yes" to any one of questions 2-4, you may either need to answer additional questions to obtain approval or consider an alternative strategy such as to apply for guaranteed issue coverage.
However, if you answered "No" to questions 2-4, you can expect to be offered a policy. Some companies will ask a few more questions, while other companies’ questions may be slightly different: however, with simplified underwriting, you will experience far fewer questions and invasive tests than with a typical life insurance application.
Companies will strategically use simplified underwritten and guaranteed standard issue life insurance for multi-life programs. The difference is that more death benefit is usually obtainable via simplified underwriting.
By collecting census information and factfinding, Cedar Point Financial Services LLC is able to determine if simplified underwriting can provide the amount of life insurance your business needs for its business succession, key person recruiting, retention, and loss strategies.
We are Here to Help
If you are considering life insurance coverage for business owners or key talent but are hesitating because funding solutions may seem burdensome, there is a path forward to overcome these issues. The business planning specialists at Cedar Point Financial Services LLC can help you identify potential key person liabilities, explain programs available for business succession, executive benefits, and tax-deductible qualified plans, as well as review the different multi-life underwriting programs that may be available to you and your team, including guaranteed standard issue or simplified underwriting.