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July/August 2009

Commentary - Hans H. Mathisen

Buying and Selling a business when the owner dies - LIFE LETTER for July tells the story about Rick and Warren. This happens all too often. A properly funded buy-sell agreement will provide the surviving partner with enough cash to buy the shares from the deceased partner's estate. It's a win-win situation.

Should I insure my mortgage through the lender? - We all like to be in control of our own financial affairs. As LIFE LETTER for August points out, when we get our mortgage insurance through the lender, we surrender the control to the lending institution.

LIFE LETTER MATURE - zero in on the cost of passing the family cottage on to their children (Will it be an asset or a liability?) and an organized process that must be used when selling a home (Steps to complete when selling your home).

THE STOCK MARKETS - The major indexes continue moving up. These were the year-to-date gains of the indexes as of July 31, 2009: The S&P TSX is up 23.03%; and the Dow Jones gained 4.50%. In Europe, Germany's DAX increased 10.85%; France's CAC 40 stood at 6.47%; and England's FTSE 100 rose 3.93%. In Asia the growth is also noteworthy: Hong Kong's Hang Seng Index grew 42.99%, and Japan's NIKKEI Index is up 16.90%.

Less than two weeks ago. The Governor of the Bank of Canada stated that "the recession is over". Mr. Camey has been criticized for this comment, but the fact remains that hundreds of billions of stimulus dollars from the governments of the free world have not yet found their way to their intended targets. And the stock indexes appear to support Mr. Camey's statement.

Hans Mathisen





Buying and selling a business when the owner dies

Like many business owners. Rick and Warren thought it would be a simple process to continue the business when one of them died. Nothing could be further from the truth.

Rick and Warren had a printing company and were equal partners. Warren died suddenly. Warren's shares passed to his widow, Sarah, who became Rick's new partner. She expected a regular paycheque to continue, even though she knew nothing about the printing business and could not contribute to the daily operations of the company.

Rick went to several banks to get a loan so he could buy Sarah out. The banks refused to lend him the money to purchase the shares of a business that had just lost a co-owner. With only one qualified person running things and not enough cash flow to hire a replacement for Warren, the printing business quickly failed.

This situation could have been avoided if Rick and Warren had properly funded what is known as a buy-sell agreement. In most cases, the easiest way to fund a buy-sell agreement in the event of death is with the use of life insurance. The three most common methods are:

Criss-Cross - This method involves Rick buying a life insurance policy on Warren and Warren buying a life insurance policy on Rick. As the owner and beneficiary of the policy on Warren's life, Rick would soon receive the proceeds from the life insurance company and have enough cash to buy the shares from Sarah. Provisions can be made for Rick to take over the policy Warren had on his life. Warren's estate would be responsible for any income taxes triggered by the sale of his shares.

Promissory Note - This method has the company buying policies on both Rick and Warren. The company would be the owner, beneficiary and premium payor of each policy. When Warren died, the company would receive the proceeds from the policy on his life. In the mean time, Rick would buy the shares from Sarah (or Warren's estate) and pay for them with a promissory note. Once the proceeds are received from the life insurance company, and because they would be received tax-free, the company could declare a capital dividend. This allows the company to pay Rick proceeds tax-free which he would then use to pay off the promissory note. Warren's estate would be responsible for any income taxes triggered by the sale of his shares.

Corporate Redemption - This method involves the company buying life insurance on both Rick and Warren. The company would be the owner, beneficiary and premium payor of each policy. When Warren died, the company would receive the proceeds from the policy on his life. The company would then declare a capital dividend and the proceeds would be used to purchase (or redeem) the shares directly from Warren's estate. Rick's shares would reflect the increase to full company value but retain Warren's cost base, meaning income taxes would be postponed until Rick's shares are sold.

A properly funded buy-sell agreement provides the surviving partner enough cash to buy the shares from the deceaseds' estate and gives the surviving spouse fair value for the shares. And Rick would have enough cash-flow to continue the business.

For information purposes only and not intended to provide specific advice.

Want help with your buy/sell funding?

Call Hans Mathisen today at (306)242-7042.
or email -

Copyright © 2009 Life Letter. All rights reserved

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Should I insure my mortgage through the lender?

Marc and Loma just bought a house and, like most home buyers, they needed a mortgage. During the financing process, they were offered mortgage insurance by the lender. They wanted to know more before taking the coverage.

Do we control the policy? Because the coverage is usually a group plan, the agreement is actually between the lender and the insurance company. Marc and Loma would be insured under the policy and pay the premiums, but the lender would be the beneficiary and receive all proceeds on death.

Can proceeds be used for something other than paying off the mortgage? Marc and Loma agree that it makes sense to have the mortgage paid if one of them dies, not necessarily paid off. They would like the survivor to invest the proceeds and use the income to continue making mortgage payments. That way, once the house is debt-free, the income can continue from the investment. The coverage through the lender dictates that proceeds will only be paid to the lender to pay off the mortgage.

Can we get better rates because we're healthy? In most cases with lender-provided coverage, non-smokers pay the same premiums as smokers. Some plans are now available that give non-smokers a break but they don't consider other lifestyle factors that could further reduce the premium.

Is coverage flexible? Marc and Loma have other needs they want taken care of in the event of death. The mortgage coverage through the lender is for the mortgage amount only and decreases along with the mortgage balance. They would still have to arrange for other insurance to cover their additional needs.

Do we have to get coverage from the lender? Marc and Loma learned that they can get their coverage anywhere they want. Another point that concerned them is that premiums for the lender-provided coverage are based on the amount of the mortgage, their ages and the length of the mortgage (amortization period). This means that if they pay the mortgage down quickly, they would continue paying full premium for coverage that has reduced along with the mortgage balance.

Can the survivor continue their coverage? Only one benefit is paid out by lender-provided insurance. For example, if Marc dies first, Loma cannot continue her protection. If she is in poor health at that time, Loma may not be able to get coverage at all. By working with an insurance advisor, Marc and Loma were able to take care of their total need for insurance, not just the mortgage. By using personal policies, they were able to get guaranteed coverage and premiums. They choose who receives proceeds when death occurs and the beneficiaries can decide how best to use the funds. Plus, coverage is portable.

Lender-provided insurance is generally tied to only one mortgage. Some plans may provide for some level of portability of coverage, but there is usually a time limit. So, if Marc and Loma rent for a period between homes, coverage could be lost.

Want help with your insurance planning?

Call Hans Mathisen today at (306)242-7042.
or email -

Copyright 2009 Life Letter. All rights reserved

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