Business-owner marketplace made easy
Jeffrey M. Wadsworth, MBA, CFP
Many of you are exactly where I am in this stage in your career—some are trying to get to where I am today, and many are where I want to be.
In my opinion, it doesn't get much better than that!
All of us together are facing many of the same struggles and challenges but also are feeling the incredible sense of joy and accomplishment that we are all blessed to feel and achieve in this great industry.
I often warn new advisors that they had better watch out early in their career to make sure that they like this industry, because once you become good at what you do, it is very hard to leave this amazing industry . . . no matter what challenges you may face.
And for all of you who are struggling a little this year or are facing some major hurdles in your lives and your careers, maybe, just maybe, I'm the guy you were supposed to meet this week to tell you something extremely important.
And that something is . . . to never give up! Whatever you are facing:
Don't back down!
Keep working at it!
I believe in you!
We believe in you!
Believe me, if I had had my way 25 years ago, I wouldn't even be here.
I tried to quit a long time ago, but, thankfully, I couldn't find a real job that was paying more than I was making, so I stayed and I struggled and I achieved some really neat things, and I struggled some more, and now . . . I'm here talking with you.
How crazy is that?
It took me four and a half years to make my first MDRT qualification. It took another seven years to make my first Court of the Table and then four more years to make my first Top of the Table qualification.
I remember where I was standing in my office when my assistant, Sherry, officially added up the numbers from about 20 different carriers, and I realized I had made my first Top of the Table qualification. I think I made it by like $5 extra!
I put my hands in the air . . . and I felt this amazing feeling of accomplishment, relief and joy, and I think a few tears!
I had just made a goal that I had set 11 years prior while I was attending my first Annual Meeting.
I remember running to the ribbon table to get my white ribbon, and I carefully placed it on my badge so that it wasn't crooked. Then, I did the all-important act of taking a selfie with my badge and sending it to my wife!
She, above all other people, knew how much that meant to me and how much hard work and sacrifice it took to achieve.
Now, please realize that in order for that accomplishment to be made, I first had to set the goal to be here. Then, I had to achieve that goal. Then, for most of us, the next step is Court of the Table.
I did the same thing with my badge for my first Court of the Table. I ran to the table, took the selfie, and sent it to my wife!
I think, for most of us, growth in our production levels is simply the natural result of growing, learning, and being great at what we do.
I would like to challenge you right now, if you've never made it before, to set your goal at Court of the Table. And if you've already achieved that, set your goal at Top of the Table.
And you know what they say about goals. Watch out—you may actually achieve them!
If any of you were in Anaheim in 2012, you may remember the guy who busted out crying at the end of his Main Platform speech about his best client dying in a motorcycle accident. Well, that was me. The quote that everyone remembers from that entire speech: "Watch out when you set big goals and dream big dreams, because goals and dreams do come true!"
Well, that story was the basis for this session that I'm going to give now. You see, I was having a tough time working harder, and there didn't seem to be enough time in the day to sell enough smaller cases to make Court of the Table and Top of the Table.
I was taught by many people that if I raised my average case size, I could possibly achieve Court of the Table and Top of the Table production . . . and possibly with less overall cases.
Well, I was sold!
Using these strategies started moving me upward in my production, raising my average case size, and enabling me to achieve Court of the Table and Top of the Table qualifications.
Well, here we go.
Have you written a life insurance contract that was in excess of $50,000 in annual premium? How about $100,000? The most important question is actually, how would you like to sell a $50,000 or $100,000 premium case, not once, but several times a year? How about several at the same time to the same company?
And if you could do this, would it possibly change your career and family goals for the better? Absolutely!
In these business examples, I will refer to these types of insurance policies: cash value, guaranteed death benefit, and term insurance. It doesn't bother me if you use IUL, VUL, UL, or whole life for your cash value policies. That's up to you. If you use 10-, 15-, 20-year term, or even return of premium term, that's fine. Whatever works the best for your clients and your practice is what you should use.
My speech on the Main Platform in 2012 was about one of my best clients who died in a tragic motorcycle accident, which changed the course of many lives in an instant. Danny left behind a young wife named Jen, a seven-month-old daughter named Skylar, and four different businesses. Danny handled all of the finances, and I primarily had a long relationship with Danny and not Jen. Danny and I always met at the business, and I had only met Jen a few times in person before Danny died. I remember it like it was yesterday when I walked through Danny's front door about two hours after the accident. I saw Jen standing across the large room, crying in her father's arms. When she saw that I was standing across the room, she stood up straight, looked me in the eye, and yelled, "You're not supposed to be here!"
The room went silent. She instantly fell back into her father's arms and began to cry uncontrollably. I walked around the room and waited until she was ready to acknowledge me, and then we hugged and cried for a long time. You see, at that moment, when I walked into the room, I represented the reality that Danny was really dead.
Another key to the story was that four months prior to the accident, Danny, Jen, and I were reviewing one of Danny's original life insurance contracts that I had placed on him and his business partner, Karl. It was both part of his overall buy-sell funding for their primary business and his first executive bonus policy. It had a large face amount and was being overfunded for future tax-favored retirement income.
Danny wanted to cancel the policy and use the cash value to fund an extensive landscaping project that he had already started. After going back and forth many times, I got a little frustrated and said that I could make one phone call, cash surrender the policy, and have a check to him in a few days. It was only then when he shocked me and asked what I would do if I were him. I took a deep breath, told him what I would do, and he kept the policy!
Little did I know that in just four short months, I would be sitting across the table from Jen with a checkbook in my hand, not for the cash value of the policy but for the full face value of the policy. Also, these proceeds were income tax free, completely liquid, and a whole lot bigger than the cash value.
Everyone who has been in the business a while knows what I mean when I say that delivering death claims to widows will change two sets of lives—the beneficiary and your own. This one in particular changed me in a dramatic way for the better . . . forever!
The end result of the planning we had done over the prior eight years left all of their businesses intact and healthy; the right people remained in control of each business; Jen didn't have to go back to work; and Skylar doesn't ever have to wonder if she's going to college. You see, Danny was one of the few people who actually had the right amount of life insurance to meet both his family and business needs.
Now I'm going to show you how we started our first conversation with Danny and Karl about their life insurance coverage. The first thing you should know is that I met Danny and Karl through a cold call from a business phone directory. I mentioned that at the beginning of my Main Platform speech last year, but there was something I left out—I didn't actually make the call! At the time, I led a small business group of agents, and I had one of the rookies cold calling out of the phone book.
One of the first questions I asked these business owners was this, How long have you been doing this, and how did you get started? As they answer this question, write everything down and keep probing deeper. See if they really like what they do. Also, you can ask them, What would you do differently if you could change one thing in your business? These types of questions help you see how they think about things. Their answers will help you when you ultimately are designing your plans to present to them.
Since most business owners are proud of their companies, they will have no problem telling you the financial stats from the past few years. Always ask about the following:
- Total revenue
- Gross and net profit
- The number of employees both full-time and part-time
- Their key employees in the business
- Is the business seasonal or cyclical?
- Are they trying to grow the business, maintain it, wind it down, or sell it?
- Do they provide health insurance? Employer contribution?
- Is there a retirement plan? Employer contribution?
OK, let's stop here a second. The last two questions are actually the keys to any overfunded life insurance sale. Can you think of why that would be?
Most employers today are paying for some type of health insurance coverage. When they say yes, ask, What is the annual premium your business pays for health insurance? The answer to this question is like pure gold. Why? Because it's always a very large number and they are never very happy about it. When they say $50,000, $100,000, or $250,000, ask them, How much of that is for you and your family? and How do you feel about that? These answers must be written down word for word.
Next ask, What type of retirement plan do you have? Why? See what they say. Ask, What would you say is the overall annual cost of the plan to your company? How much of that goes toward you and your family? Most likely, their answer will show that they aren't exactly thrilled with their own plan. Ask, Are you putting in the maximum? They probably aren't because most plans are top heavy, and the owners can't fund their own plan. They may even tell you that they were sent more back because they put too much in and not enough employees put their money in the plan. When I hear this, I say, "That sounds like a great plan! I need to set one of those up for my company!" They normally start laughing with me because it's absolutely absurd that they are paying for the plan and can't even fund their own account at the maximum level. They will agree with you.
And here are the magic questions, the two that will make them want your plan even before you put a proposal together!
You say, "If I could change your retirement plan document to let you put $100,000 a year into your account, would you do it?" They will most likely say either yes to the question or that they wish they could put $100,000 but they couldn't afford it. You then say, "Could you put $50,000 into your 401(k) if they'd let you?" Do you see what's happening here? You are asking them a question that both they and their CPA want to say yes to, but you just haven't agreed to the amount! Once you've agreed to a number, you say, "That's fantastic, but I have some good news and some bad news for you. The bad news is that there is no way that the IRS is going to let you put that amount of money into your 401(k) plan. The good news is that I can design a plan for you that will allow you to contribute $50,000 or even $100,000 per year. It can be just for you and no one else. It will grow tax free and spend tax free in retirement. You can even have access to the money before age 59½ if you need it. If I can put a plan like this together, what amount of contributions can you commit to on an annual basis for a minimum of five to ten years?"
That's it . . . that's how you frame the conversation. It's something they want that they are finally being told they can have. They can control it, they can meet their own personal retirement funding and planning goals, and they are finally building a tax-free income source for retirement.
Now let me ask: What is the only investment vehicle you know of that has all of these benefits? Life insurance.
We call these plans executive bonus plans; SERPs, or supplemental executive retirement plans; Roth IRA look-alikes; and a rich man's Roth IRA.
I also call it "Getting to Court of the Table and Top of the Table with Fewer Cases." How's that sound to you?
Next, I want to show how to transition into a focus on the owner's key employees. We call these types of plans nonqualified deferred compensation plans.
Let me ask a few more questions.
What do employers care about the most? What is on their minds all the time?
- The strength of their business
- Cash flow
- Credit lines
- Spending more time with their families
What are they most scared to lose?
- Their business
- Key employees
- Cash flow
- Time with their families
What happens if they lose a few key employees?
- It can be devastating to overall productivity and profitability.
- Business owners many times must pick up the slack.
How hard is it for business owners to set up an attractive incentive plan where they can lock in key people while attracting new talent and only put the people they want into the plan? Why?
- Virtually impossible because of ERISA regulations
What if you ask business owners if they would like to know how to set up a key employee incentive plan and that they could do the following:
- Choose the participants
- Choose the funding amounts
- Choose the vesting schedules
- Choose the age when employees receive their benefits
- Have the possibility of leveraging the funds for current business needs
- Grow the benefits on a tax-deferred basis
- Build in a cost recovery mechanism
- Insulate the business from the impact of the death of a key employee
- Allow the business to be in 100 percent control of benefit access
- Have the ability to include a noncompete clause
What are the odds they will say no?
Do you know the only investment vehicle that can produce all these benefits? It is a cash value life insurance policy, properly designed, positioned, and funded in a business . . . by you!
Here's how I introduce the solution. I say, "If I could show you how to set up this type of plan for each of your key employees, would you be able to invest $10,000 per year into each employee's plan?"
Remember, their health insurance premiums for their company are probably $50,000 to $500,000 per year—$10,000 for a crucial employee is a piece of cake.
Then, I say, "The difference with my plan verses your other employee benefits is that I make sure your plan does not fall under the ERISA guidelines, so you can control all aspects of the plan to maximize the benefits for you and the key employees. All of the other plans heavily favor the employees only."
How does this sound so far? Now, how are you going to let them know you just asked them to buy a $10,000 premium life insurance policy for each of their seven key people? No problem, right? Well, it actually is! Believe it or not, the people who are least scared of large premium insurance policies are business owners. Remember how much they're already paying for their business: health, liability, overhead, and workers' compensation policies. They're already desensitized to $10,000 to $100,000 premiums.
Now, don't get me wrong. I'm not saying that they enjoy paying the premiums. What I'm saying is that business owners are willing to invest their resources into profitable endeavors for their company. One of the greatest assets business owners have is their key employees . . . and they know it! And they are willing to invest in that asset to ensure their business's continuing profitability. When trying to stomach the fact that you are asking for large premiums, always try to put things in perspective. An $833 per month truck payment is $10,000 per year. To entrepreneurs, their key employees are worth much more than a truck. The other extremely important factor that many of you have never tapped into is the power of the business checkbook verses the personal checkbook. In my opinion, this could be the single most important aspect of working with business owners. Let me prove my point. When do most of your personal clients start to get uneasy when it comes to the monthly premiums of life insurance? How much are they willing to commit to a cash value life insurance policy? Approximately $100 to $200 per month. The premium of $200 per month is $2,400 per year. When I first started, that one sale was a good week! Now that I have my own business, I found out about these funny things called overhead costs. What does that mean? It means that I need more like five to ten sales a week, depending on your commission structure. What I've realized over the years is that I don't want to have to market, sell, and service 10 individual contracts per week unless they can be written as a group. This reduces the selling and servicing to one location and entity—the company. I truly believe that you will find that it takes the same effort, and sometimes more, to sell a $200 per month case at the kitchen table versus a $10,000 case at the boardroom table. Why do you think that is? Because they're used to writing large checks out of the business checkbook, and this is perceived as a strategic investment in the future of the company.
Here's how to do it. You say, "In order to maximize the benefits of this plan, I'd like to build in three layers of benefits for you, the company, and your key employees:
- Current Benefits Employee
- $250,000 of free life insurance for his or her family
- Possible future retirement income
- Increased morale and sense of ownership in business
- Golden handcuff on key employees for minimal cost to corporation
- Key person insurance coverage
- Increased employee morale and productivity
- Leveraged loyalty
- Owner can intentionally overfund one or all the employee contracts for owner's future business or personal cash needs
- Noncompete agreement language in legal document
- Future Short-Term Benefits Employee
- Possible increase in life insurance and retirement income amount Employer
- Building own corporate bank for liquidity and credit needs
- Increased bonding capacity through increased cash value balance sheet item
- Tax-deferred growth of plan benefits
- Can use funds from a separated employee's plan to fund new key employee plans
- Future Long-Term Benefits Employee
- Retirement income to replace a total of $60,000, $120,000, $180,000, etc., of working income
- Structured as $1,000 to $2,000 per month for five to ten years
- Ability to use vested benefits to negotiate possible purchase of company stock for business transition planning
- If death occurs during retirement phase, beneficiary continues to receives entire vested benefit
- Funding of plan benefits are paid by insurance contract cash values or from company cash flow, whichever they choose
- Business controls the contract for the duration of the policy
- Possible seed money for employee to use to purchase company from owner for business transition purposes
- Deferred retirement money for business owner if employees leave for any specified reason
- Company can retain residual death benefit coverage indefinitely until employee actually dies."
Remember, this seminar is simply giving you the framework to build a dynamic and unique benefit offering to the business owner. Just because these plans are not regulated in the same manner as a 401(k), they can be problematic if you don't set up the plan properly. Specific regulations are different for each country and many times for each state in the United States. You need to build a team consisting of you, the advisor, a sharp attorney who is very familiar with these types of plans, and the advanced planning division of your company or the carrier that you are proposing. If you are new at this, the best advice I can give you is to ask an advisor who does these types of plans on a regular basis to go with you.
Now, as a recap for the executive bonus plan on the owners, we showed them how to do the following:
- Invest as much as you wanted
- Have no 1099s while it's growing because it is tax deferred
- Replace your current term insurance in order for you to be eligible for a Roth IRA alternative investment
- Not have a 59.5 age limitation for withdrawals
- Possibly use this plan to meet some or all of your buy-sell insurance needs
- Create a tax-favored retirement income
- Create a "virtual buyer" for your company
The question we asked them was this, Would you be able to invest $50,000 to $100,000 per year for five to ten years?
Now, remember what you just said and how you said it. You just asked for an enormous premium, you asked for it annually, and you asked for it in a manner that expected the answer yes! Here is the most likely downside. They may say, "I can't do $50,000, but I could easily do 25,000."
The only thing you have to do at that point is not to either fall down or jump in the air and yell, "Top of the Table!"
Believe me when I say that this scenario can start to happen for you, and on a regular basis. Your biggest hurdle will usually be the corporate CPA if he or she is a legitimate advisor to the owner. If so, you frame the conversation with the CPA like this:
"How do you feel about Roth IRAs even though they are not currently tax deductible? What do you like the most about a Roth IRA?
- Tax-deferred growth
- Tax-free withdrawals
- No 59.5 age limit for basis withdrawals (deposits)
What do you like the least?
- Income limits make clients ineligible.
- Even if eligible, there are very low contribution limits.
What I have showed the owner is a plan that captures all of the best features of a Roth IRA without the strict IRS eligibility and funding limitations. They are currently eligible to fund this type of plan at anywhere from $50,000 to $150,000 per year of after-tax money that will do the following:
- Grow tax deferred
- Have no 59.5 age restriction on withdrawals
- Payout on a tax-favored basis
- Encompass the owner's buy-sell needs at the same time"
Remember, they have already agreed to the benefits, you are simply presenting the only investment vehicle that allows the business owner to maximize all of these benefits.
Believe it or not, we aren't done yet.
The last transition is the actual buy-sell insurance that every business owner needs, especially if he or she is the sole owner of the company. Here is where you show business owners how to cover the excess value of the company that is above their current amount of personal life insurance. In other words, how much would owners be willing to sell the company for cash? Take that number and subtract their current amount of life insurance. That is the minimum amount of insurance you should be proposing. If clients agree to the overfunded life policy for the Roth IRA alternative plan, then subtract that amount of death benefit from the number. This number that is left over is easily covered with 10- to 20-year term insurance or return of premium term insurance.
Remember, these policies are at least for $1 million and usually higher. The best part is that CPAs love buy-sell term insurance, and owners knows they need it. The only temptation is to not present or fight for the overfunded plan because it's easy showing a multimillion-dollar term policy.
Here's my advice: Raise your goals and fight for what's best for your client!
I wish you amazing success!
Dream big dreams . . . and you will achieve them!
Jeffrey M. Wadsworth, MBA, CFP, is a 19-year MDRT member with six Court of the Table and seven Top of the Table qualifications from Severna Park, Maryland. The president and CEO of Wadsworth Financial Consulting, he specializes in working with business owners and high-net-worth individuals.