TSB Money Matters

The Entrepreneur's Guide to Leveraging Life Insurance for Legacy Building

• The Savings Bank • Season 1 • Episode 5

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Join me, Ally Houghton, as I explore the often-neglected fortress of life insurance with experts Joe Scurio and Wayne Demers. Together, we dissect the intricacies of protecting your business's future and the livelihoods that depend on it. We kick off with a deep dive into the world of buy-sell agreements, revealing how these can be the lifeline for a business in navigating the stormy seas of an owner's untimely death. Joe offers an eye-opening perspective on the hurdles of loan procurement in such scenarios, while Wayne champions term life insurance as a beacon of strategic financial security.

Peering into the often-overlooked niche of small businesses, our conversation shifts to the pivotal role of business expense disability insurance and the lifelines it provides. I unveil the less talked about side of disability—how medical advancements have altered the landscape of work absences—underscoring the undeniable need for comprehensive insurance planning. We wade into the waters of loan approvals, emphasizing the importance of adequate coverage, and the role key person insurance plays in this delicate dance, particularly when SBA loans enter the picture.

Bringing our chat to a close, we reflect on the safeguarding power of early insurance planning. We unpack the myriad advantages of securing insurance sooner rather than later, considering the harsh realities that can befall those who wait. The conversation culminates with a focus on the ripple effects of offering group benefits, how these can be a magnet for top talent, and the profound impact they have on families during life's most unexpected moments. Our insights are more than just advice—they're a clarion call to entrepreneurs to fortify their legacies with the compassionate and strategic use of life insurance.

The TSB Money Matter Podcast is produced by The Savings Bank, a community bank headquartered in Wakefield, Massachusetts. The information presented is for informational purposes and should not be considered financial, legal or tax advice. Consult with a banker or financial advisor about your personal or business finances.

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Visit us at www.tsbdirect.bank

Ally Houghton:

Welcome to TSB Money Matters, where we dive deep into the dynamic world of banking, finance and everything in between. I'm your host, allie Houghton, and we'll tackle topics including landscapes of financial institutions, economic trends and the ever-evolving technologies shaping the future of banking Today. My guests are Joe Scurio, senior VP, commercial Banking Officer at the Savings Bank, and Wayne Demers, financial Planner. Thank you both for joining me.

Wayne Demers:

Thank you, Ally, thank you for having us.

Ally Houghton:

So to start, how does life insurance help protect businesses and business owners?

Wayne Demers:

Well, there's different aspects of life insurance for businesses, which is different than for an individual, because you're gearing it to protect the business for the next generation or just to protect it while you're momentarily disabled, and one of the first things is a buy-sell agreement. A lot of small businesses, if they're in a partnership, and we'll give you an example. Two brothers get together. Partnership, and we'll give you an example. Two brothers get together. They're going to start a landscaping business. Doesn't matter what the business is, they're starting a business and their business is growing as years go on, right. So now, 20 years later, let's say it's Joe and Bob, joe reaches down to tie his shoelace, doesn't come back up. He's gone. Right, they're brothers. He's gone. It's tragic. They go to the funeral. He's buried. Now guess who? The new partner is? The spouse. That's your new partner, and now she's calling up going.

Wayne Demers:

You know my husband used to come home with $2,000 a week. I'm looking for the $2,000 a week in order to support my family. You're all family. You all want to take care of each other, but you have one partner that's gone. They used to contribute work and a benefit to the business. Now they're gone. Now you have to replace that person, which costs money, and so now it's a partnership. The spouse can force a fire sale of the business because they technically own half of it, or the brother can go out borrow money on his house. Joe, where would the average person try to come up with a large sum of money?

Joe Scurio:

Yeah, usually it would be. If they have the ability with equity in their home to refinance their home or, you know, do a business buyout, you know they might have to actually try to get a business loan to buy out their partner.

Wayne Demers:

And so now, how easy is it for someone to get a business loan if they don't own real estate in the business and maybe their equipment isn't? You know, it's 10 cents on a dollar. It's not a lot of value and it's basically their goodwill.

Joe Scurio:

Yeah, you know it's not impossible by any means, but you know there are programs that exist that we participate in, which is called the SBA-owned programs, and those exist to help kind of circumvent any deficiencies in collateral, if you will, where the bank can enjoy a guarantee percentage from the SBA up to 75% in most cases and in some cases up to 85%.

Joe Scurio:

But it is difficult, you know, than most, without collateral to try to get a loan, especially if this partner, everything was really tied in with them and their spouse. There's some challenges there too, but the way you laid out a buy-sell agreement certainly has an appeal, I would think, for a business owner to have something like that in place in the event that their partner, whether it be family or non-family member partner, was to pass and leave them in dealing with their new partner being the remaining living spouse. So it's an interesting concept and I have to be honest with you, it's something that I had never really given a lot of thought to until we had initially met some time ago and decided to have this podcast. So I really think there's value in this discussion to educate our business, small business community, as to what other options are out there. And while it is an insurance product, it definitely has some major overall value to the remaining owner, the surviving owner of the business, based on how you've established that.

Wayne Demers:

Now you talked about they could get a business loan on the business. What time frame would that take up?

Joe Scurio:

Well, you know you have to go through the application process, gathering all the background information, financials, what have you? The bank has to do its due diligence. Typically, underwriting can take a couple weeks, depending on where the bank is in its status with the SBA. Depending on where the bank is in its status with the SBA, if a bank that's a preferred lender can make the actual final decision for the SBA. It's a delegated level of authority. We are not a preferred lender with the SBA, but we still have the opportunity to do a straight 7A loan. We just have to submit the documents to the SBA where they would make the final credit decision. That could take a little bit longer when the bank is not a preferred lender. But a preferred lender can certainly do things, probably in about 30 days and that's if somebody was aware that they could go and get that business loan Correct.

Wayne Demers:

So just to give you an idea about my solution for a small business, just to give you an idea about my solution for a small business and again, a lot of small businesses are family businesses and when the death of a business owner happens, not only does it devastate the business, it devastates the families, because nobody fights over money, right, you know? I mean, hey, the mortgage payment didn't get paid, it doesn't matter, right, the kids didn't get their groceries or their gymnastics lessons. You know, not a big deal. But let me tell you how the insurance company approaches it. Years ago used to do it with cash value whole life. God bless the IRS. They decided to take a big benefit of the cash value whole life away from that market. So now the best way is a 10-year term on. Each owner can be multiple owners. We call it a buy-sell agreement. A lawyer has to write up the agreement. You have to remember I'm not a lawyer, so a lawyer writes the agreement up. The agreement, you have to remember. I'm not a lawyer, so a lawyer writes the agreement up and now you have to put something in it in order to fund the agreement. Okay, where's the money coming from? Is it equity in your house? Do you got a pile of money somewhere that you're going to come up with the money the easy way, the least expensive way way 10-year term on all the owners and how its formatted.

Wayne Demers:

The business owns the policy, the business pays the premiums, the insured is the business owner and if there's three owners, there's three different policies. And this is the business owner and if there's three owners, there's three different policies. And this is the one that gets some people. They're thinking if the spouse is going to end up with the money anyway, why shouldn't it be the spouse that's the beneficiary? Well, the insurance company pays goes like this Was the policy in force? Is there a death certificate? Where would you like the money sent to the beneficiary? And it can happen in a matter of days, not weeks, not months. It's here's the death certificate. They read down the beneficiary's name. Here's the death certificate. They read down the beneficiary's name. Where do you want the money electronically sent. And if the spouse is the beneficiary, there's nothing there to say. She still does not own a part of that business because the insurance company writes that check out to the beneficiary. There's no strings attached to it. So you have the business that owns the policy, is the beneficiary. If there's a death, that check goes to the business. Now the business writes a check out for the outstanding shares of ownership of that business to the spouse of the deceased. That makes it work out really easy, keeps families together because people start fighting over money because the money's not there. Now, hopefully, 10 years goes by, nobody died. Everybody wins.

Wayne Demers:

You know, that's one aspect of a buy-sell agreement. There's a few other little intricacies of a buy-sell agreement you can get into, but we're not going to get into all of those, right, right, and yes, you need a lawyer. And I will tell you. I have talked to a lot of small business owners that had partnerships and they were very good. They had a business agreement written up. And then I look at them and I asked the next question and I say so, how are you funding the business agreement? And I get the pause and basically it is. They got a business agreement but the money's magically going to show up from somewhere Right, and usually it's somebody's equity in their house while the business dies.

Joe Scurio:

Right, you know, I think you know the example you gave was great. But I'm curious as a bank, you know we deal with a lot of sole proprietorships and single-member LLCs. So in a situation where you have that structure, how would the buy-sell agreement impact?

Wayne Demers:

You could do it on a one person On a one person. You could do it on a one person, and what's good about that is the spouse is going to get the money she needs. And also, this could be a sole proprietorship where there's 20 employees and if they feel secure that their payroll is going to come through every Friday, you're not going to lose the business Friday. You're not going to lose the business when there's a lack of funding. What happens is employees leave vendors that you deal with, shut your credit line of credit off. It allows continuation of the business, keeps it solid enough so it can be sold, if that's the plan, or at least keep it alive long enough for another family member or key person to take over the realm. Okay.

Joe Scurio:

Okay, no, that's very interesting.

Ally Houghton:

So what are some of the best types of insurances, do you think, for small businesses? Like, if a business doesn't know where to begin, where should they start? Like, what is the number one insurance that they should really invest in over anything else?

Wayne Demers:

First off, the buy-sell agreements in order to fund the death of a partner or even a sole proprietor. The next best thing after that is insurance on a key employee, and the reason for that there are businesses out there that will die with the disability or the death of a key employee, and there's two things. You can have life insurance on the key employee where the business owns the policy, the insured is the key employee and the business is the beneficiary. And that's in case that person passes away, all right, which allows funding to go hire somebody to do his job and keep the business alive, because there's going to be an interruption in the amount of revenue generated. And also, if it's a key employee, you as a business owner want to help provide for his family. And how are you going to do that? Most businesses can't sit there and write a check for a few hundred thousand dollars, right? I know most businesses. If you ask them to write a $50,000 check, they're out of business, right? So we're not talking corporate America here, we're talking mom and pop operations that do half a million, a million, $2 million, $10 million a year. Their cash flow is critical to them staying in business.

Wayne Demers:

Another one that's critical that I would encourage everybody is to have business expense disability insurance and what that does that allows. If the owner or a key employee gets disabled, there's money to help pay all the business expenses and people will go well. What if the owner or the key in person just get disability insurance? Well, that means he's only gonna get two-thirds of his paycheck. A business needs more than two-thirds of a paycheck for one person. That that policy alone would allow to help will pay the disabled person's paycheck, pay business expenses for the business and give them money to hopefully replace that person for the time he's disabled. And this is a key thing. I'm going to put a plug in for our medical institutions.

Wayne Demers:

Years ago there were people that would get injured or disabled from an illness and that was it. They were out of the workforce forever. You know, somebody's missing an arm. He's no longer part of the workforce. Today, with medical science, the way it is, people are going back to work. In one to two years You're not disabled for your whole life anymore and there's a great risk it's like a one in eighth chance that a worker will be disabled sometime in his work life and he may be disabled more than once and return back to the you know work site. So those are the real two key ones that I look at and stress. Protect the business from two dangerous things that can happen in a business's life the death of a key employee, or the death of a owner, or the disability of either or the death of a owner or the disability of either.

Ally Houghton:

And, joe, I'm sure like in your line of work with the commercial businesses and everything you've probably seen, you know something like this happen to a business and then fail because of it.

Joe Scurio:

I have seen a very similar situation where it was a family, there were three, three brothers, one had passed and it did create a little bit of family turmoil with the surviving spouse. And you know, this particular buy-sell agreement certainly piqued my interest to learn a little bit more about it as well as it can. It probably could have solved some some heartache for that family, but but they got through it with a, with a little bit of a legal battle along the way and took a few years to settle. But it's certainly, you know, it's out there, it exists, and I think it's just getting the word out to help educate the small business community that we serve.

Joe Scurio:

But as a banker too, you know, with any loan we do, there are basic insurance requirements that we're looking for. We're always looking for general liability insurance. If we're taking collateral, we're looking for the insurance on any collateral coverage. If there's a piece of real estate involved, obviously the property insurance, and that can lead to more. You know, once you get a property in the mix for collateral, if it's in a flood zone, then flood insurance is required.

Joe Scurio:

So from a standpoint of lending, you know, a business that has proper levels of insurance from the, you know soup to nuts and in certain cases, like Wayne was describing, the buy-sell agreement, it really provides improved access to credit. Overall agreement it really provides improved access to credit overall. You know, banks and other lenders will be more comfortable extending credit if they know the future of the business is secure with the appropriate levels of insurance. And to include the key person insurance which we do a lot of, or what I should say is we take collateral assignments of key person insurance quite often in our small business lending as an SBA lender. In a lot of cases SBA is looking for that as well. So there's a lot of good information here. I think today that we're giving to the small business community.

Ally Houghton:

For either of you, is there a key time that people starting a business should really think about this insurance, look into it. Should this be in their business plan, or is it something for them to do further down the road once they're settled?

Joe Scurio:

I would say it's probably at any point in time that they want to be either thinking about becoming a business owner. They may be a business owner for 10 years, haven't thought about it. They should start thinking about it. I don't think you're ever really too late to the game to start thinking about the proper levels of insurance. Well, I'll leave that to the insurance expert to follow up with.

Wayne Demers:

Well, what's the old saying? You're going to save for retirement. When's the best time to save for it? As early as possible, and if you didn't do it already, today's the next best time to do it, because life happens and the younger you are, the easier it is to insure you and the less costly it is to insure you.

Wayne Demers:

Somebody comes to me and they're in their 50s, they're diabetic, they're overweight, they have asthma.

Wayne Demers:

Their insurability is now coming down to almost zero, and so it's better to have it early, when it's cheap, than to wait until you need it, which, I hate to say it. A lot of people do that. They call me up and they go oh, this just happened and I want to be covered for it, and you're like well, it's too late for you now because you've got all these health problems, and that's why I'll look at a key person, at somebody that can keep the business alive. If the owner himself is not healthy enough, I'll look at a key person and say, okay, let's get it on him, because you might be able to keep the business alive with that key person. If something happens to you and if something happens to the key person, you may need that money to help keep it alive also. So what is insurance? It's you spend a little bit of money for a risk that you couldn't afford if it happened, and I see people spend more money insuring their cell phone.

Joe Scurio:

That ain't worth a hundred bucks. It's all risk mitigation in the end.

Wayne Demers:

And that's it. And, like you said, somebody comes to you and say I have as many angles as I know covered that you're going to get your money back, and so that, from a lender's standpoint, is strong. It's strong for you to say, yes, I want to loan you the money. Somebody comes in, you know on a, you know he's flying a business by the seat of his pants. You're going hey, there's nothing here I'm not going to dump into this.

Wayne Demers:

And a lot of small businesses they rent the facility they're in. Their business itself is the person that's running it, and maybe a key person. The value of that business is almost zero if you do not have the owner. And here's a number you got to work with 80% of small businesses do not sell. So everybody who thinks that, well, I'll just sell it, right, well, 80% do not sell. And who wants the business that is starting to go down the tubes because the owner had a heart attack and he's not working a business because he can't or he died.

Wayne Demers:

Worse, and even the employees go. Think of it. Even the employees run away from a business. When they go, oh, this ain't gonna last. Now that joe died, right, they run away. They go somewhere else and you ain't going to last. Now that Joe died, they run away, they go somewhere else and you can't run a business without employees. But if you have some money coming in whether it's through disability insurance or life insurance and the bills are getting paid, people are going to stick around. The vendors are still going to drop stuff off. People are going to stick around. The vendors are still going to drop stuff off. People are going to still pay their bills and it gives you the time to recover and that's the key. A business running is worth far more than a business that's not.

Joe Scurio:

Right and I can tell you from the bank standpoint. In a lot of our loan structures there are default covenants that would surround the death of an owner a guarantor in this case. So when you have a buy-sell agreement such as this, it could certainly help to cure any level of a default that would have been triggered through the death of one of their one of the owners. So you know, it's something to seriously think about in that structure.

Ally Houghton:

Do you think group benefits for employees are helpful to small businesses? Is it a good way to attract better employees?

Wayne Demers:

You want group benefits, you will attract better employees. And here's the other thing too If you're a small business, usually you have limited capacity to give people a lot of benefits, right. And sometimes you have people that, if they get hurt, are sick. We're not talking on the job, right, we're talking. Somebody got hurt, you know, on the weekend playing baseball, threw his shoulder out. Now he's out of work for a couple of weeks or six weeks and he's lost income. Well, if you can give him a benefit that covers that income, now he's not coming back too soon to work and re-injuring it, he's not incurring a financial hardship. And even worse than that, I actually had this happen. I had a small business for many, many years and, like most small businesses, we didn't have group benefits. In fact, we didn't even think we could get them. All right, and it's just a matter of knowing which insurers will insure white-collar versus blue-collar versus small businesses. Of three businesses of you know, 10,000.

Wayne Demers:

I had a worker good guy worked for me for many years. He was looking forward to retiring. In the fall he was 61. At home he had a massive heart attack and he died. He had no life insurance and as a small business owner. I'm horrified.

Wayne Demers:

One one of my employees died that I knew well and I knew his wife. One one of my employees died that I knew well and I knew his wife and all I could give to the widow was well, I owe him two weeks paid vacation. I owe him his last week's pay and you know, basically I'm going there with a few thousand dollars and she's devastated. She lost her husband plus his income, and as a small business owner I much would have preferred to have a life insurance policy, a term, you know, annual, renewable term policy that the insurance company could have written a check for $100,000 or $200,000 or $300,000 to this gentleman and it would have made it not so much less tragic for her because she lost her husband, but at least there wouldn't have been this huge financial burden on her. And in small businesses you become personally connected with the people that work for you, absolutely.

Wayne Demers:

And if you could get group benefits and the insurance company covers a big check, because that's the only one who can write a big check. I hear people all the time oh, I could write a check for a half a million dollars. Right, you probably hear it, I could write that check for a half a million dollars and I go really Write that check. I'm going to go down and see if it'll clear they're talking equity in their house, what they think their business is worth. They'd have to liquidate so much in order to write a big check that their whole lifestyle would be gone. Only the insurance company can write that big check. Only the insurance company can write that big check. And the reason why they do is they get a large pool of people knowing that they're going to write that large check for a small number of people. So it would be foolish not to have some group benefits Exactly.

Ally Houghton:

Yeah. So just to wrap up, what do you think is the most important final advice you want to leave with small business owners today?

Joe Scurio:

I'll go ahead on that one. I would just say you know, reach out to Wayne directly or myself at the bank. We'd be happy to have an in-depth conversation on, you know, any of your business needs, whether it be finance or insurance, and I'll turn it over to Wayne if he has anything to add on top of that.

Wayne Demers:

Well, I encourage people to look at their business and how are they going to protect the business? So many small business people are so busy running their business and trying to keep it afloat, they lose track of how to protect the business, and what we're talking about today is protecting the business, which protects the livelihood of entire families.

Ally Houghton:

Well, I want to thank you both for joining me today. I think small businesses have a lot of great information here to listen to and really see the importance of life insurance for their businesses. So thank you both and thank you to our audience for listening, and we will be back with a new episode of TSB Money Matters very soon, Thank you. Thank you, Allie.

Wayne Demers:

Thank you, Allie.

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