115. Infinite Banking For Key Employee Benefits In Canada

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The question that comes up all the time is, can I ensure a key person or people in my business and can I, can I provide a benefit or an incentive that would inspire that key person or key people, you know, to stay with the company? And, and the answer to that question is yes. And that's it.

Podcast over.

That's it.

Yeah.

That's the shortest episode of Wealthville, Bay street and it's history.

The way that this comes together. So if you think about, you know, companies that, that we deal with, you know, we deal with corporate owners every single day and most, most, if not all of them do have key people in their business, key people that they rely upon and that heaven forbid, if the unthinkable happened, there would be a temporary disruption to, to the business and to obviously to the people in the business that care about that person and their surviving family and so on. And out of, most often coming from a place of generosity, from a place of wanting to reward and to retain these key people, the business owner or the ownership group say, look, what are some additional things that we can do? And then the topic of life insurance comes up and the use of, you know, these, these dividend paying, participating whole life insurance contracts. Now where this idea stems from is if, if you think of larger companies, you know, these Fortune 500 businesses, commercial banks, et cetera, they utilize these participating policies under the framework of corporate owned life insurance or bank owned life insurance. Now on the banking side, the banks can't utilize the policies the way that, you know, you and I could, you know, accessing policy loans, repaying policy loans and things like that. The banks have to utilize those contracts in a much different way. That's another topic for another episode, the corporate owned life insurance aspect. So imagine in this case real scenario, so client who owns a very successful business, had two, still has two really key employees and said, look, this is what I want to do. The end result was two dividend paying, participating whole life insurance contracts being put into place. The corporation is not only the owner of the contract, but also the premium payer. So there's no conferred, no benefit to the employee himself. In both cases it's a gentleman and the corporation controls that contract. So all of the accumulating cash value the corporation can Utilize the policy loan provision, which in this case the company has exercised that several times already for.

You were saying a truck. They just bought a truck recently.

Yeah, yeah, exactly. So a truck for the business and a multitude of different concrete, you know, tools and mixers and things of that nature. And not only experiencing the simplicity and the ease of doing that. Right. And you know, I said yesterday in the webinar that we did that, you know, there are no terms that are better than your own terms.

So when you're dealing with policy loans, you know, the corporation controls the repayment schedule of that there's a death benefit, life insured is the key person in the business. The corporation has an agreement in place with those key employees that describes what happens if and when either the employee decides to leave the business.

If the employee, God forbid, the unthinkable happened and the employee passed away and the corporate owner said, look, I want to make sure that these key people stay with the company, and the longer they stay, the greater the incentive if they retire at some point, we will continue to provide, you know, to, to these key people. And God forbid, you know, when that day comes and they pass away, the business has decided that they want to also provide a benefit to the surviving family of, of the deceased key employee. It's a, it's a great arrangement. Now, of course, it's all legally binding, so you need to have an attorney involved who understands how to put together a legally binding document. The key employees were encouraged to and did retain their own legal counsel for advice and a review of that document to understand exactly what was happening and what was being put together. And the employee also is being given the opportunity, if they move on at some point, to purchase the policy from the corporation at fair market value. So you've got the company owner, the company, the key employee, an attorney at some point, possibly an actuary who's going to provide a certificate of fair market value on that policy. The employee will have the opportunity to buy it. If the employee just says, hey, I understand I've got first right of refusal to purchase this insurance contract. I'm deciding not to purchase it. The corporation will continue that contract and continue paying the premium and continue utilizing it and honor its commitment to the key employee. Isn't that good?

Oh, it's, it's great. But it's also important to recognize that there's.

One, one of the way reasons that this stems, what, what originates this idea and this business who's put this together is a combination of things. It's the desire to want to do something for the employee. Also the desire to want to keep that person because the longer that person's with the business, the more successful the business is. So, so there's a, there's a win win situation created out of that. Yeah, the, the other piece that I think is important to mention is that business owners and businesses are always looking for a way to attract talent and keep talent. And so because of the nature of competitiveness in a business market that certainly in a construction environment, which is kind of what we're talking about here, you know that, that can be a transitionary type of industry, people will go from job to job and company to company. It does happen. I know I have former construction experience. So the, the, the common theme is to do what everyone else is doing.

Right.

What's every other construction business doing? Oh, well, they have this benefit plan and. Oh, there's a, there's a, some kind of a matching registered retirement savings plan option for the employees that the employees know nothing about. Often don't even set up themselves, don't pay attention to, don't get any education on, don't watch their values, may or may not participate and on and on and on. And, and it's still only a stopgap method. It doesn't really retain. All business is doing is they're just trying to do what everyone else is doing so they can say that they have it. It's like we need to check and tick a box. Oh yeah, well, we've got this. That we can offer people to, to try to keep them. Okay. But everybody's got that. So what makes you unique or different? And so I think part of what this stems from, and you can correct me if I'm wrong, Jay, but this business owner, they, I'm going to take a wild stab in the dark. I'm guessing they're not a big fan of, I don't know, government sponsored programs.

Much and not so much.

And recognizing that that's not the path that they wanted to be able to operate their business in, they were looking for an alternative where they could add more value, do something unique and different and also add value to the business where, you know, now they're not getting, when they fund that premium that's coming with an after tax corporate dollar, they're not getting a deduction on that because it's an asset on the books of the corporation. Right, right. So, so, so it's not being issued out as a, as a wage or, or a benefit where, you know, they would write that off in some some format right now, but they get to maintain control and utilization and they also get to tie the employee to the business for a longer time frame, which is really, really helpful. That's really what they want more than anything else because the longevity of that relationship is what speaks to profitability for the company. And but now they're are able to use that source of working capital, whereas if they had just gone ahead and chunked the money into some match program, that money is gone. Yes, they get the immediate write off, but it's gone forever and it can't do any additional value for the business. Again, that can help the business grow. Now if the business grows and that's a key employee, doesn't that also lend itself to maybe future bonuses and future potential for that key employee, a future opportunity? The stronger the business is, the more opportunity exists for that key employee.

Yeah, and from a, you know, purely from the perspective of key employee, you know, we get questions like, so we had some great questions from one of our private Facebook group members who had brought up this topic saying, hey, I'm really looking into this and it's very interesting but I have some, you know, some questions. And one of the questions was, you know, should, should the employee be with the business for a specified period of time before, you know, you decide to implement this option? As a business owner, I would say that that is really truly a case by case basis. You know, it depends on what stage the business is at as well. So you may have someone who has 30 years of experience in the area of business that you're just launching and a proven track record and you know, so you don't want to say, look, hey, I want to kind of test drive you for the next five years to see if you fall into the key employee category versus creating this, this great plan, you know, right from the get go. So it really truly is a case by case basis. You know, another question that came up had focused on is there is the premium paid, you know, is there some taxable event that happens, you know, for, for the employee? And I mean, we're not chartered accountants, you know, we're not providing any tax advice. But based on the context of the question, if the corporation is the premium payer and the policy owner, then there wouldn't be, you know, a taxable event to the employee for the payment of premium. And so, but always best. Just another reminder to consult with a chartered accountant, a designated professional who can give you tax advice. But nonetheless, you know, a great question from an underwriting standpoint. So actually Getting the coverage in place, the underwriter at the insurance company is going to want to know and ask specific questions like what is the educational background of the key employee? What specific contributions has that key employee made to the business? So the underwriter gets a deeper understanding of, yes, this person is in fact a key employee to the business. You know, we had a company in the logistics business, parts distribution, a big business, and had applied for a significant amount of death benefit on one of the key employees. And these questions had come back similar to what I just shared, in addition to many more. And the employer was able to paint that picture to say, like, this key person is directly responsible for, directly responsible for the product development, product listing, product distribution to the tune of more than $3 million annually. And the underwriter understood that and said, okay, yeah, that would definitely fall into the definition of a key employee. And we ended up getting, you know, the coverage in place. And so what's most important is to have a conversation with your advisor, first and foremost, and to talk about what exactly it is that you are setting about to achieve. And then the advisor can put, pull together the strength of our entire team, our extended team members who are designated professionals, who can be drawn into the conversation and then part of formulating the plan and the best way to put it together. Because there are, as you know, Rich, I mean, there's, there's really some customization to every, every case.

Well, and I think, you know, further to that, Jay, like there's also some, I guess the, the, the questioning, the underwriting questioning to determine that key employee status. Even prior to that, there's some initial filtering or estimation that can be done. And, and you know, you may have somebody as an example. Let's say you have the business owner and the business owner try to get insurance on themselves, but they found out they're uninsurable.

Right.

Maybe they don't have a lot of insurable interests in their life. So they're kind of lack of better terminology. They're grasping at straws. Who's a body? I need a body. Who can I get this insurance on? Help me find a body. Right. And so you, you, you know, we, we look at, okay, well, what might a body be? Well, do you have any key employees? Let's talk about that. And so in some instances, people say, well, yeah, I have employees, but maybe they don't really fit the definition of key. So you're trying to manufacture something and that's just not really going to fly with no insurance company. Because it has to be. There has to be a legitimate reason for the insurance to be enforced, for it to exist, there has to be some measurable, demonstrated loss. So in the world of insurance, the life insurance company and the underwriters are looking at what is the, what is the financial loss when this person is gone? So what's the lost income potential, et cetera. Right. And, and then if you needed to replace a key employee, again, depending on these things like skills and education, like you talked about, maybe you have someone who's, you know, construction company and they're a form, maybe they have a journeyman certificate and they've got some, you know, maybe they've been doing it for five or 10 years and they've got some experience. But if they're a carpenter or an electrician or something like that, the skill level that that person has, although they might be exceptionally good at their job and they might have learned additional skills, the reality is you can probably, you can attract another person with similar talents for let's say two and a half times what you pay that person. So let's say they earn a hundred grand a year. Okay, well, maybe if you had $250,000 of death benefit that shows up if, that, if you lost that key person, well, you can say, look, I'm, I'm looking to hire someone I'm paying a bonus of a hundred grand to just to bring you on. And I'm looking for these skill sets and you can kind of replace that individual and then you have a little bit extra money and cushion left over to handle the problems that arise because that person's no longer on site getting the job done. Yeah. Right. So, so again, just recognize and think as a business owner, what is your, what do, what's the loss potential if this person was gone? And, and before we, you know, even getting into the, the arrangement of future retirement compensation and, and all this other things that you mentioned, Jason, when we started the, the chat, just consider for a moment, really, how is your business going to be impacted?

Yeah.

If you, if you lose an individual that makes a big difference in your business, what is going to happen to your business? You know, we talk about this even just for the business owner all the time. And I think it's just so important. You know, you look at the balance sheet of a business, it shows all the assets and all the liabilities and all the things that are on it. But the number one most important person in the business has never shown on there, and that's the business owner.

That's right.

Or the partners or the multiple Business owners. Well, if that, if they were properly on there, what you would see on the balance sheet is you would see cash value of insurance, which means they're actually covered. They would show up in some way mathematically on the balance sheet, and they should. And if they're not, if you don't have that, you might want to consider reaching out to an advisor and a coach and start implementing that process. Because if you get taken out of by the business, what the heck happens to the business? How much business is there without you if you're the business owner? And then what point, and then what's the trickle effect? What happens to all your staff, all your employees that you care about and you want to see succeed? And then how does, how does your spouse deal with everything? If you have a business partner, does your business partner want to be in business with your spouse? Usually the answer is no. I, I can't think of any single time where the answer that I, to my, to this date, in my experience, where the answer has been yes.

So that's a very good point. You know, it's, it's the analogy that we use often too is that, you know, as travel, you know, travel opens up and people are getting on airplanes and traveling, when you're taxing to the Runway for takeoff and all the announcements are, you know, being shared, one of which is, you know, in the unlikely events that there's an incident with this aircraft, oxygen mass will drop from the ceiling. Be sure to put yours on first before helping someone else. And so if you're a business owner and you're thinking about your key team members, make sure that you've got your oxygen mask on first before helping anyone else. And that speaks to exactly what you just said. And having an advisor who can assist you with.

Flushing the objectives out and the ideas out initially, bringing in all the right professionals to consult and advise so that everything is structured properly, that it's legally binding, that it addresses what happens while the life insured is alive and employed? What happens if employment ends voluntarily or involuntarily? What happens if there's insolvency, Disappearance, divorce, the list goes on. A document that is properly put together will address all of those things and so much more. And then what happens when the life insured passes away? And how is the corporation going to handle the receipt of, you know, the death benefit proceeds and so on and so on. And.

I'm quite confident saying, I mean, on our team, we've, we bring all the expertise to bear and really, really thoroughly enjoy putting those arrangements together because we know that it brings the business, the business owner, everyone who relies upon the business for their livelihood that much closer to having a proper, complete and executed plan in place. Because so often, especially in the business owner community, plans are discussed and maybe even framed up, but not executed. I can't tell you how many unanimous shareholder agreements I've seen that were never.

Executed.

Or a buy sell arrangement that says you should, everyone should have insurance and then they never go and get it. They don't actually fulfill the obligation of what they signed on that they need to do.

Or you talk to the corporate owner and the corporate owner says, well, or the entrepreneur says, this is exactly what I want to see happen in the event of. And then you go to the agreement and the agreement says something entirely different. And so that's why it's so important, you know, work with, work with the right professional. And I mean here at Ascendant, and we bring all that expertise to bear and love putting those types of cases together.

You use the airplane analogy about putting your mask on first. And as you were saying that, what popped in my brain was the video series that we're releasing with Nelson Nash. And it's revisiting an old session of Nelson. You can go to learn from learnfromnelson.com to see all those. And in one of those clips, Nelson shared a story about a company. And this is in the States. And they were a grocery chain, a very large grocery chain. They've been around for like 50 years. And every year, every quarter, they, all the heads would get in their jet because they had their own jet or whatever, private jet, you know, big business. And they would go and fly around to different, you know, parts of the country and they would, they would physically, they thought they were doing the best thing by showing up being leaders and they would hand out their, their, their bonus checks to like the guys who were running the store and all that sort of thing. And, and then, you know, they glad hand everybody and slapbacks and high five and everybody's doing a great job. Keep making money for the business. Right. Well, would you, would you believe that seven, I think was. Seven of them died in an airplane crash? Because in between one of those journeys, and it wasn't long, it wasn't long after that, that business ended up getting bought out by a competitor because the business couldn't survive because they didn't have the capital injection that they needed to do that. And they didn't plan very effectively. So it's exactly for that reason that, and this I think this happened back in like about 1992, 1993, somewhere in that range. It's exactly for that reason why insurance is in place and buy sell arrangements and these things happen because you have an organization. All it takes is one event that you can't manage or control. And in the last couple of years, we've all been living through an event we can't manage or control to end your business. And the only way you can protect against that is things that are designed to protect against risks, unknown risks or future risks. Well, that is the basis of what insurance is. Hello.

And that's a reason why we have a policy in place where no more than two leaders on our leadership team can travel on the same flight path together. And so if our, if our leadership team is going somewhere, then they're going to be a few different airplanes that take the entire team there. And that's just a precautionary, an added precautionary measure. You know, so.

I love the, the questions that come up, especially in our, know, our private Facebook community and which is Wells without Bay Street. And so we thank, we really thank our, our folks in that community for, for raising good questions. And so the, the answer is yes, you can ensure key people in your business, there are certain steps to take to make sure that it's done properly. Our team will help you to ensure that it's done properly. And once it's in place, what a great feeling. You know, the feelings that come up for the entrepreneurs once it's done is they say, you know, it's, it's something now. It's a file that's been closed in my mind. Like I can free up that mind space now for other things in the business. And I'm so happy and relieved that it's done, it's in place and it just brings certainty.

Because look, we're all going to face the same fate. Everyone listening, watching is going to die someday. And gosh, like you said, Rich, such good points around, like, you know, what would happen if you have to have those discussions and if there's ways to mitigate the what ifs, then, you know, you should be. Logic would dictate that you would explore those, those options.

So you don't want to use too much logic in your financial life, Jay.

He said sarcastically. And on that note, you know, you mentioned, you mentioned obviously there's, there's important steps that can be taken and, and about, you know, safety, security and preservation. And so on that note, we would also encourage everybody to go and check out seven steps. That's seven steps CA for seven simple steps on the learning journey, the learning path on how you can be up and running to become your own banker. It's a very simple guide and we explain everything there. We provide all the resources of what the best recommended path to doing that to determine if it's the right fit for you should go through an education process to decide. And that's what that report is all about. Seven steps CA and then additionally, you mentioned the community. I think it'd be important for people to know how to find that community. There should be notes in the, in the details of the podcast here in the description, but you can go to wealthwithoutbaystreet.com forward/community that'll bring you directly directly to the Facebook community site. So you can request to join and yeah, we hope to see you in there. And a lot of great commentary that happens in there. And Jason and I often go live a couple times a month in there and have a little rant session or share some, share some fun about what's going on. Updates in the business, updates in the, in the industry. Sometimes we, I don't know, you know, kick a few things, kick a few people in the nuts along the way. Maybe government or what have you. Tax Man Anyway, we have a good time. It's a lot of fun and we really appreciate all the members of that community for, for sticking with us and, and, and engaging with one another and the relationships are being built there.

That's awesome. On that note, thank you to all of our listeners and to all of our viewers. Make the rest of your week great. It was awesome being with you all today.

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