In this new world, where technology is advancing at an unprecedented pace, social media continues to expand. An immediate response to all forms of communication is expected. Managing change is essential to security and prosperity. Effective financial planning, therefore, becomes an integral part of today’s world as it allows us to manage change in business, daily life, financial obligations, and health, without losing our bearings.

The following article presents scenarios depicting potential business obstacles and challenges, together with possible cost and tax effective solutions to be considered.

David, 35, has been practicing naturopathic medicine as an associate of a clinic for over five years. He has established a solid foundation of committed patients and his practice is growing steadily. The timing is optimal for him to pursue his dream to open a clinic together with Rob, his long time friend and a chiropractic doctor. They played football in high school, attended university as high performance sportspersons and discussed opening an integrated clinic of health care professionals specializing in sports medicine. David and Rob are both married and each is expecting a child—for David, it will be his first, for Rob, his second. David and Rob signed a lease on a location, secured financing of $150,000 and contracted other qualified practitioners who will join as associates of their clinic.

David and Kathy, his wife, are looking forward to exciting changes ahead; however, with change comes risk.

Approaching the lender, it was brought to David and Rob’s attention, that assurance for the debt obligation in the event that either partner succumbed to sickness, injury or death would be required. This could be accomplished with Life & Disability insurance. Rob had purchased personal life and disability insurance, years prior, for himself and his wife. However, David in the early years of his career did not appreciate the value or recognize necessity of insurance. The business partners and their wives all felt it crucial to keep the business debt separate from personal obligations. The solution was to purchase a 10 year term insurance policy on David and Rob whereby the benefit of $150,000 would be paid on the first death. They each purchased a disability policy that would provide a monthly benefit to cover the amortization period of the loan. This proved to be a cost effective plan providing assurance with guaranteed fixed payments. The partners were one another’s beneficiary allowing proceeds to be received tax free. To satisfy the lender, an absolute assignment was established. This stipulates the lender has an interest in the life and disability proceeds. The insurance contract in conjunction with the absolute assignment will protect David, Rob, their business, families as well as the lender. Since insurance was required to satisfy the loan, premiums can be deductible as a business expense.

The process gave David a better understanding of risk management. The due diligence practiced by lender and insurance companies alike proved to be a valuable lesson. David began to ask questions of risk in his own business and personal life. If he were to die, how would Kathy and his new baby be affected financially? Would she have to choose between staying home with their child and going back to work? Would she be at risk of losing the house, or suffer a drastic reduction in lifestyle?

David knows the effectiveness of healing with innovative therapies and alternative treatments. Allowing the body time to heal can reduce the time in rehabilitation and promote better health. However, treatments are costly and time is money lost. Was there a prudent strategy which could provide David and his family with the required monies in the event he became ill or injured? Insurance can provide peace of mind, reduce the possibility of severe financial ruin, give an individual, their family, business and partners an opportunity to gain control and most importantly provide choices. It is important to know what is available in the marketplace as well as the possible deductibility of premiums.

Coverage can be structured so as to protect a business need, such as a Buy/ Sell agreement (where the continuation of the business and the future purchase of shares amongst shareholders is duly funded in the event of death or disability); Key Person coverage (to protect the business from the loss of its most valuable contributors); Business Overhead Protection (which provides reimbursement for business expenses in the event of an owner’s disability); Business Loan Protector (which makes funds available to cover outstanding business loans or loan interest); Critical Illness coverage (which pays a lump sum tax-free benefit upon diagnosis); as well as various personal life and disability insurance plans.

Managing change is essential. There is no time like the present to take control and manage the future. Knowledge, especially as this pertains to effective financial planning, is required in order for us to make sound, educated decisions. This allows us to manage change in all aspects of our business and daily life. As strategies can be complex, it is prudent to always consult an insurance specialist.

Published in BCNA Bulletin Summer 2011

The information in this article are presented for general knowledge and the content should not be relied upon as containing specific financial, investment, tax or related advice. Clients must seek their own independent professional advice to discuss their own personal circumstances before implementing this type of arrangement.

E&E/O 2011

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