Succession planning in small businesses usually focuses on getting enough key person life and disability insurance. But neither product fully addresses the financial strain on the business and business owners that occurs when an owner is stricken by a critical illness such as a heart attack, stroke, cancer or dementia. Not only does this result in a coverage gap, it also means the agent failed to sell the full solution.
But now, a rising product, critical illness insurance (CI), can plug the gap for a reasonable premium. With more carriers offering a wider variety of CI products, there are more opportunities for you to profitably solve your client’s problem.
Succession planning starts with a sound analysis of the current situation. You need to understand who the business owners are and whether the need is to protect the business, the owners, their beneficiaries or all these entities. To that end, find out what kind of insurance is in place, the purposes designated for each insurance policy, and the current values of each of those policies.
In many small businesses, insurance proceeds are used to buy out the interest of an owner who dies or becomes disabled. CI fits in perfectly here because it provides a lump-sum payment of up to $500,000. The full benefits are paid when a covered critical illness is first diagnosed. The better policies cover about a dozen major illnesses. There’s no coordination of benefits, so receipt of funds doesn’t diminish payments from other policies.
CI can provide the business with a buffer if a key owner or executive becomes seriously ill. Replacing a top person is time-consuming and expensive. Money in the bank can buy the business the time it needs. Though the individual may already have disability and/or long term care insurance that pays monthly benefits, a lump sum payment can make an immediate difference to reduce the financial strain placed on the business and/or the owners.
The beneficiary or beneficiaries can be the business itself, the owners or family members.
Pick a classy chassis
CI policies are built on either a health insurance or life insurance chassis.
The health insurance chassis is the more common approach. This is a stand-alone CI policy, with premiums payable monthly, quarterly, semiannually or annually. (Payroll deduction via list billing is available.) A big advantage of this model is that the policy owner can keep the policy for life with one carrier (but with other carriers the policy will terminate at age 70). Some CI insurers reduce the benefit amount by 50% at age 65, but some do not.
Additionally, group CI plans are available, with a minimum size of 10 lives.
More recently, a few insurers have introduced CI built on a term life chassis. The insured buys a term life policy with a rider that allows the benefits to be used in full for a critical illness. (If the benefit is used up for the illness, it won’t be available as a death benefit, of course.)
The advantage of the term approach is low cost: the rider is inexpensive. The disadvantage is that when the term is over, it’s over. This can be a great way to go if the need for coverage is only for a limited number of years.
It’s also important for the owners to have LTC insurance for succession planning. Now, LTCI also comes in models built on either a health or life insurance chassis. One major insurer offers a universal life policy that lets the insured use 2% of the death benefit each month for LTC. (If any amount is left over, it’s payable on death.) This is an advance because up to 100% of the death benefit can be used for care. Most previous policies limited the benefits to 50% of the death benefit.
Many people resist buying an ordinary LTC policy because they feel they’ll never use it. A combination life-LTC plan answers that concern because permanent life insurance will always be used unless the policy lapses. A combo policy lets you cover your client’s life insurance and LTCI needs for succession planning with one policy. Add a CI and a DI insurance policy, and your client is fully covered.
CI is a commonplace in countries like Britain and Japan, and increasingly popular in Canada. But in the US, probably less than 1% of agents actively sell it.
Their loss can be your gain. Learn about CI, its features, applications and the products available from different carriers. Clients in their 40s and 50s are in the sweet spot for it. They’re old enough to be concerned about succession planning, but young enough to usually be in good health and get underwritten. (The maximum issue age is 64.)
One of the great things about CI is that you’ll meet little sales resistance. LTCI, in contrast, is a challenging sale because most people think the policies are just for nursing homes and the clients never plan to go to a nursing home. But most people feel that if they are stricken with a critical illness, they’ll recover and go back to work eventually. CI is a more “optimistic” product, and it’s a lot easier to get people to listen when you talk about the need for it.