Key Person Insurance Explained for Business Owners

It's not that any person is indispensable, neither is your equipment or your buildings or anything like that. But you certainly go and insure the rest of that stuff. And I think that we have to really continue to shine a light that this is not showing up on the balance sheet of the business. The key people who are actually generating the profits for the company, the machinery in the buildings are just tools to make all that happen, but it's the people that do it. The ability of key people in your business means the difference between profit and loss. Insure them just like you insure your machinery, your buildings, your equipment. Ensure those key people. It's not machines, it's not equipment, it's not buildings that make you money. It's people. So accountants are really great at assembling all of the items that need to land on a balance sheet. But the one thing that I still can't find anywhere on a company's balance sheet are the people. And so when you think about how to create basically salary continuation packages, how to ensure there's a guaranteed market market or your stock to be redeemed when you're no longer around, how to create policy for the tax collector and how to create one for the family, how to protect your joint venture partners. If you're investing in real estate, that's a business. And so we want to talk about how to protect the money making machines in whatever ventures you have. And the money making machines are the people. And that's been coming up Sarblo, in conversations that we've been having with prospective clients who may not even know that you can do these sort of crisscross or seesaw arrangements where think about our own company, like I have an insurance policy on where you're the life that is insured, the company owns it, the company pays for it. There's a number of tax advantages that come along with that. You own a policy where I'm the life that is insured, your company pays for it, your company owns it. There are a number of tax advantages associated with that. But what we've created is a guaranteed market for our stock when we're not around anymore. But I wanted to ask you, like, what comes up for you in these discussions that you're having with business owners and joint venture partners in real estate and just in general, like, what's coming up around this topic.

So we meet with an investor and then obviously we talk about, you know, some specific goals that they will get accomplished by becoming a banker in the life, etc. Etc. You know, all the goals are tied towards financial growth, financial well being, financial strength, confidence in financial ability, things like that. And then we take a deep dive into. Okay, using an example of. There's these two people, let's just call them John and Smith, and then they've incorporated to buy, let's just say a real estate project. Okay, Right. And then they'll say, yeah, we've secured the first mortgage from the financial institution. We went ahead and raised some extra capital because it was a big purchase. We got some private investors too. Here's a plan to pay the bank. Here's a plan to pay the investors. Here's a plan to make profit. Here's a plan to manage the property, the, the asset itself, but that not one person has ever talked to me about. Here's a plan to manage the risk in case something happens to my partner who I'm really heavily relying on for the good guidance because they bring a ton of experience. Nobody talks about. If that person disappears from planet Earth.

Yeah.

Are you going to manage the risk?

Well, especially if the one partner or both partners play a role in the deal.

Yeah.

But the ability of having that partner is the difference between profit and losing money.

Yes.

Right. And so both parties involved in the deal make that difference. And so you've got to assure that they're both taken care of to manage the risk. Exactly.

Like you just said, to talk about all the things. But the people which really, truly makes things happen, especially the JVs, the shareholders who are the key to the business because it is their thinking that is making things happen. Right. When we, you know, ask some more questions, I said, hey, who's your JV partner? And how young is the JV partner? And does a JV partner have a family? And in most cases they're like, yeah, my JV partner has a spouse and they have kids. And I'm married and I have kids. And I said, just think about a day, the worst case scenario, JV Partners disappears. Yeah, he owns 50% shares in the business. You own 50% shares in the business or she owns 50% and you own 50%. Doesn't matter what happens to the shares, who takes over the ownership of the share. When your JV partner disappears from planet Earth, the shares are going to roll over to the surviving spouse. That's the most typical scenario that will come up. Right. Okay. So you are in business to go in business with the JV partner because JV partner has certain skill sets. But now those shares are not with the JV partner anymore. It actually Got rolled over to the surviv spouse. Do you want to do business with the spouse? Does the spouse have the same ability, knowledge, know how, experience that the spouse will bring to the table? And in, in most scenarios, the answer is no. Like, you know, that spouse is, is there because of my partner, my JV partner. And we have a great relationship as, as JV partners and friends. And that spouse may not bring the same experience as the expertise. I said, then what's going to happen in the business going forward?

Well, and the spouse in most cases doesn't want to have anything to do with that.

Exactly.

And so you want to create a guaranteed for that stock. So look at it from this vantage point, just in general. If you had a hundred thousand dollars and you put that $100,000 into a savings account at a conventional bank and you were getting 5% on that money, so now you've got money making money, right?

Yeah, yeah.

So you would make $5,000.

That's right.

On that 100 grand. If you've got a key person in a business and you're paying them a hundred thousand dollars, what kind of value are they generating for that business or that joint venture partnership? You think it's, you think it's a little or a lot more than $5,000?

Oh, it's, it's, it's, yeah, multiple times over than five. In fact, it's probably more than a hundred thousand dollars that they take from the business as an income. So.

Precisely. So when you lose a key person.

Yeah.

You're created a significant financial loss, whereas money just sitting there in a savings account is just money making money. We're talking about key people. And when you think about the business aspect, if you went to the bank, okay, and we say, hey, we want to borrow some money to expand the company, while the company is going to say, look, if you don't have your machinery, your buildings and all of that insured, we're not doing business with you.

Yeah.

But rarely does that banker sit down and say, unless the two of you have coverage on each other, we're not doing business with you. And so it's not that any person is indispensable. Neither is your equipment or, you know, your, your buildings or anything like that. But you certainly go and insure the rest of that stuff. We have to really continue to shine a light that this is not showing up on the balance sheet of the business. The key people who are actually, it wasn't generating the profits or the company. The machinery in the buildings are just tools to make all that happen. But it's the people that, that do it, right? So one of the things I wanted to show you, I was having a conversation with a business owner, and this is the, the numbers that, that we were actually looking at. But the problem that we had to address. Okay, what was the problem that we were trying to essentially solve for? And when it came down to it, we said, look, in your business, you presently have three key people. These are key people that really steer the earnings and, and drive the growth in the company. I want you to consider hiring a fourth key person in the business. And the business owner said, well, what are you talking about? We don't need to hire anybody. So. Well, I just want you to consider this for a second. Just consider hiring a fourth person in the business. And we're going to guarantee the stock redemption. So when you look at the. This is premium, okay? So this is what you're going to pay the fourth key person in the business. This policy is going to become a key person in the company. You're going to pay $50,000 a year. Now, what does that translate into?

That's $137 a day. So you're going to pay this fourth key person $137 a day. So if you pay this small amount, I'm going to deliver this big amount and you get to use this amount.

And so the business owner said, okay, wait a second.

Can you run that by me one more time? I said, yeah, absolutely. So I just showed him, honest to goodness, I just showed him two checks. And I said, look, you sign the smaller check to pay the fourth key person for this amount $50,000. I'm going to deliver this amount 1,000,036. And you get to use this amount 44,714. How we doing? What if your key person lives past the first year, you sign the check for this amount, I'll commit to delivering this amount. You get to use this amount. Shall we continue? And so I said, look, the, the fourth key person in the company is never going to call in sick. It's never going to unionize. It's never going to complain about anything. It's just going to create capital. And then when you're gone, we have guaranteed stock redemption. Because let's presume, God forbid, death occurred in the third year. The company signed checks for $150,000. Agreed?

Yes.

The company had access to 145,000 ready access capital. 1.277 million gets delivered to the company in death benefit proceeds. Because the stockholder died, the company can now pay. The surviving spouse can redeem the stock and pay no tax on that transaction. The company can now use the residual proceeds to go and hire someone else so that they can keep the business going, they can keep the employees employed, they can keep all of those contracts in place, they can continue operating and the company can never pay in with the insurance company is going to pay out. So the business owner looked at that from that vantage point and said that falls into the no brainer category.

Let me get started. Because who's paying the premium?

The company.

Because the company has the capital.

Yeah.

The company is just an entity. The key people are the company. And when we looked at the balance sheet, we couldn't find any of the key people on there. So why don't we bolster the balance sheet. Let's hire a fourth key person. It's not going to bend or break the company. We're maintaining liquidity. So when you look at this example, how much money have we put in to the policy?

50,000 for four years. That's $200,000.

How much cash value has piled up?

200,267.

How we doing?

Well, we definitely cost neutralizing.

So we've neutralized cost, we've maintained liquidity because we have ready access to capital on demand, on our terms. We're paying no tax on this daily buildup. The business signs the smaller check. We guarantee the delivery of a much larger one. There's no way that the company can ever pay in what the insurance company is going to pay out. And we don't jeopardize the liquidity for the business. Isn't that the best fourth key person that you would ever want to hire?

100% with no cost of acquisition at all. After four years you've got.

After the fourth year, you're still signing the smaller check, but the accumulation in cash value is far greater. If you were to isolate that on an annual basis. Let's just do that.

Let's pick year five.

Okay. So at year five, the company signs the smaller check for 50,000. We're guaranteeing the delivery of 1.517 million. Now the annual increase in cash value from year four to year five. So,258757 minus 200, 267. That's $58,000 annual increase in cash value. We talked earlier about putting 100,000 in the bank and making 5,000.

Yeah.

So from that vantage point of the business owner, the business owner grasps this very quickly because the business owner says, well look, what if I need to buy a new piece of machinery, and the new piece of machinery is 150,000. So you no longer need to go and borrow the money from someone else's bank. All you need to do is request a policy loan from the life insurance company for 150. They place a lien on the death benefit, not the machinery that you're buying. And the company controls the repayment schedule. The total 258,000 in cash value continues growing daily uninterrupted, while the machinery is enabling your key people to produce revenue. How much of the corporation's surplus capital do you not want residing there? Business owner said, look, how soon can we do that? The ability of key people in your business means the difference between profit and loss.

Yeah.

Insure them, just like you insure your machinery, your buildings, your equipment. Insure those key people.

Well, Jason, typically in an organization, even in our organization, we always incentivize, you know, team members for doing a really, really good job.

Yeah.

And in this particular case, this fourth key person is actually providing incentive for the business owner to having this key person on their payroll after four years.

Exactly right. That's exactly right. And, you know, the other thing that I share, and you probably have this same discussion with business owners, joint venture, real estate partners, et cetera. I asked them, like, you're looking forward to living, right? And I say, well, yeah, of course they say, well, I. I need to make sure that I'm articulating because you know that your real estate ventures are going to grow. You know that your company's going to grow. And so what I'm doing on your behalf is I'm looking down the road. And so I want to make sure that as your portfolio grows, as your businesses grow, that we have the ability, contractually guaranteed, to continue writing a much bigger check when death comes. You're focused on living, which is wonderful. And we're maintaining liquidity and ready access to capital while you're alive. My responsibility is to make sure that I'm looking down the road and taking care of that. Nobody wants to think like, oh, maybe death comes tomorrow. But the moment that that contract is in place, if death came the next day, the company signed the small check for 50,000. We're delivering more than a million. So we've guaranteed the stock redemption, we guaranteed the stock price. We have given the company capital to go and find someone who can continue helping the business grow. So everybody's taken care of.

And then, Jason, guaranteeing the redemption of the stock value. In this case, doing it our way is always going to be cheaper because it's going to be pennies and dollars. As you mentioned, the corporation will never pay more than what the insurance company is going to pay. And the alternate is if they don't plan about that and that day comes because that day is going to come, we all going to graduate one day. We are going to become angels one day.

Yep.

And if there's no planning in place and the redemption has to be made, well at that time the redemption is going to cost a dollar for a dollar.

That's a brilliant point. Where's the money going to come from? Yeah, well, it has to come from the company because the company is the entity that needs to redeem the stock. And so if the company has the option to pay dollar for dollar out of company resources, or going back to this example, if I took that 50,000 again, that's the premium and I divide that into $1,036,872, just call it 5 cents. The company's paying a nickel for every dollar. We are guaranteeing that we're going to return every nickel back to the company. Plus we're going to return many, many more dollars.

Yeah.

So whose money do you want to use to redeem the stock? The company's money or the life insurance company's money? Yeah, obviously life insurance companies definitely it's a no brainer. But nobody's talking to the joint venture partners or the business owners about this in that context. The context is about let's make sure that we cover you in the event of premature death. We're saying we're dealing with a permanent problem, not a temporary. You don't know if you're going to die tomorrow. We're asking the company to put up a nickel for every dollar of guaranteed money. How many dollars does the company want to buy at that price?

5 cents is what it takes to buy a dollar. How many five cents do you want to put it?

And you're going to neutralize it and then you're going to have ready access money. So we're not trapping that capital in a vise somewhere, we're maintaining liquidity. And the corporation calls the shots like how many dollars do you want to buy at a discounted rate? And the business owner grasps that. But the industry at large is going into comparison mode or just really, for the most part, just entirely off track. The business owner is like, look, what am I getting in exchange for deploying company resources called money? What am I getting in exchange for that? And we just described it and then some what business owner or joint venture partner, logically it's going to look at that and say, wow, that's a really stupid thing for me to do with capital.

I think the real problem that a business owner or a JV partner that they have are the problems that they haven't actually experienced yet.

Yeah.

And when we meet with business partners or business owners and JV partners, the feedback that we get from them is we never even thought about it the way you, you guys are describing it. Because like you mentioned, Jason, nobody's talking to them about it. The business owner or the investor, JV partner, they're really good at what they do, which is to grow the business or to grow the investments. And that's their laser focus. And that's where the mind goes every day 24 7. They're just thinking about that.

Yeah.

And when they have us as the strategic partners on their team, as, let's just say, wealth coach, we come in and then we shed a light on things that they haven't considered and that becomes a light bulb moment for them and they're like, this is why we are here today. Yeah, you should get this kind of expertise and guidance going forward so that you guys are seeing things that we haven't seen. And we want you as a partner alongside the journey.

It's exactly right. As business owners ourselves, and having done this ourselves, we recognize all the advantages that it represents. But for everybody who's watching this content, it's recognizing that it's solving problems that will come. Not a matter of if, but when. And going back to that business owner for a second, I said, well, let me take you out to suppose you die 10 years from now. Let me take you out to the 10th year. Let's just have a peek and see what's going on. How much money did the corporation put into the contract?

50,000. Multiplied by 10, that's $500,000.

So that's 500,000 that the company put into the contract. The total cash value of the policy is 609,507. And the total death benefit is 2,125,657. So business owners, suppose you die in the 10th year, your company utilized $500,000. So there's a half a million dollar policy loan balance outstanding. So did the corporation spend everything that it put in to the policy?

100%.

Corporate owner dies. There's a lien on the death benefit for a half a million bucks. So we take the $2,125,657 death benefit. We subtract a half million. $1,625,000,000 is being paid to the corporation in the form of a death benefit. That gives rise to the capital dividend account inside of the corporation, which is a notional account, but the account is credited and then the surviving shareholders can receive proceeds in the form of tax free capital dividends. But let's presume that as stockholders they had all agreed. Well we want the corporation to be reimbursed for everything that it put into the policy. So let's subtract another half million. Now we have 1.125 million. Corporation says well we need 100,000 to go and hire someone.

So now we've got 1.025 million to distribute to the surviving shareholders and we can do that in the form of tax free capital dividends if the corporation did not have the policy. So let's just go zap, the policy's not there. Corporate owner dies, the corporation is a half million in debt. What happens now? Corporation has to still continue servicing the debt. Agreed.

Yep. Agreement.

The corporation now has to figure out a redemption plan for that deceased shareholder's interest in the business. So now the corporation has to either a figure out are we going to dig into the company coffers to deal with this problem or are we going to try and borrow money to redeem the deceased shareholders stock? Either way, does that put the company in a worse financial position?

Definitely will.

Did the policy solve all those problems and extent?

Yeah, 100%.

And we increased the corporation's value. We created an asset on the balance sheet and the corporation paid a half a million dollars for it and got out of the deal with no debt, full stock redemption, more than enough capital to go and hire another key person to recruit somebody and pay them. Well, all the problems have been solved and it was the life insurance company's money that solved the problem, not the corporation's money.

Again, if the planning is in place, then the corporation is going to be in a proactive nature at that time.

Yeah.

And if there's no planning in place, then the corporation and other shareholders on the business are going to be in the reactive mode and that's just not good time to be operating the business because let's just say the corporation at that time had no money.

Yeah.

Well then they had to go on and take on some more debt from the third party bankers. Incorporation may or may not qualify for that debt at that time and that's just going to be even worse than.

What we're describing today, again, we just don't know anyone's best before date. You know, you find that stamped in every food product that you buy is the best before date. No human being is born with that stamp on them somewhere. And so, but we know that's going to come. So you have a policy. Premiums are paid, cash value is piling up, piling up daily, uninterrupted, can't go backward. We get full recovery of cost. It's not a matter of if, but when as you can never pay in what the insurance company is going to pay out. So you get full recovery of cost, maintain liquidity, ready access to capital to grow your company, to grow your portfolio, to expand your horizons financially. And then when death comes, we guarantee the delivery of money and we guarantee the delivery of far more money than the company or the key people. If you're doing a crisscross kind of a seesaw arrangement where if it was just a two person partnership and I said, sarbulo, I'm going to pay the premium personally to ensure your life. And Sarblo says, hey, I'm going to pay the premium personally to ensure Jason's life. Well, we guarantee the delivery of far more money neither one of us put in.

Yeah.

And it all happens on a tax free basis. So the only loser in that scenario is Revenue Canada. How many discounted dollars does one want to buy? Knowing all the problems that this insurance contract solves? But the people watching this have to recognize if they're a business owner or joint venture partner in some shape or form, they have to recognize that there's a problem so that the solution actually matters to them.

And if the solution doesn't cost anything and just creates and truly creates a solution, then that is worth considering it all day long.

And so I think that again, being biased, just going into our 16th year in this journey, much like our clients, just all across the country and now in the United States where we're serving people in the US as well. Nobody's calling and saying, really frustrated that my cash values keep rising every day and I'm really frustrated that I've fully recovered cost in, in these contracts. I'm really frustrated that God forbid if my business partner wraps his around a tree, that we're going to have more than enough money to take care of everyone and everything and we don't have to send any checks to Revenue Canada from the company coffers. No brainer. You, you can create a guaranteed market or your business, you can create guaranteed stock redemption, you can create a policy for the tax collector and a policy for your family. You can create a salary continuation package. You can create a package to ensure all of your company's credit, all of your company's debt. That's the one thing that we've been talking about, Starblow is these packages. And we'll put it together for you. All you need to do get connected. All of the information that we share doesn't really matter if no action is taken. And so get connected with the right person on our team and we will help solve your problems.

It's really good, Jason. And the link to get connected is going to be underneath this video in the description and you should click on that link because of all the packages that Jason talked about which we have, which are going to solve all the problems that are going to definitely going to come. That's why you should go click that link.

You heard it best for Sarblo. Click the link, take action. You'll be glad you did and you're going to see another video that pops up. We want you to continue your journey of learning. And so we recommended this next video for you to continue watching, continue growing and learning and we look forward to hearing, you know, your success stories with this process.