In the case of an unexpected death or disability, a business can face hardship and significant economic consequences…
But in this episode, we’re covering two essential products that can mitigate this risk: key person life insurance and excess disability insurance.
Here to speak with me is Lynne Rosenberg, President of Innovative Solutions, which provides broad market access to leading carriers of annuities, life, disability, and long term care insurance.
She’ll cover what businesses need to know about these products and how they can protect your employees, clients, and business.
Mentioned in this episode:
Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability and founder of Rubicon M&A Insurance Services, now a proud member of the Liberty Company Insurance Broker Network. Welcome to M&A Masters where I speak with leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors.
Today, I’m joined by my colleague, Lynne Rosenberg, president of Innovative Solutions. Innovative Solutions provides broad market access to leading carriers of annuities, life, disability, and long-term care insurance. As with Rubicon, Innovative Solutions is also a proud member of the Liberty Company Insurance Broker Network.
I asked Lynne to join me today to talk about a couple of areas that we haven’t talked about in the past, and that’s key person life insurance, as well as something that’s new out there for emphasis that we want to spend some time on. And that is excess disability insurance. So Lynne, welcome to the show. I appreciate you joining me today.
Lynne Rosenberg: Thank you, Patrick. It’s a pleasure. I look forward to talking with you and all of your clients.
Patrick: Well, Lynne, before we get into talk about these topics. Let’s start with you just to set the table. How did you get to this point in your career?
Lynne: You know, Patrick, that is a great story. And thank you for asking me. I’ve been doing this for 35 years. So I’m dating myself. And honestly, I started in the insurance business by accident. I wanted to be a stockbroker, a financial planner.
I cold called for a Shearson broker at night during college. Was very successful at it. And yet, when I interviewed with the top three firms at the time, Paine Webber, Shearson, Merrill Lynch, they all told me that I could be a sales assistant, but they really weren’t hiring women at that time.
So that was that. I wanted to find another way to get my securities license and be involved in the financial planning marketplace. And the insurance industry really was poised for that chapter in 1985. And so that’s how I started in life insurance. And it’s been a fantastic career ever since.
Patrick: And now we transition into Innovative Solutions in what we’re doing in and around mergers and acquisitions, and so forth. And not only mergers and acquisitions, but also a large portion of our audience are involved in private equity, venture capital. And so we wanted to see how this is relevant to them. So let’s talk about Innovative Solutions real quick, and what services you’re delivering.
Lynne: So as a business owner, Innovative Solutions, provides what I would call unbiased, intellectual information for the client. We represent over 30 different carriers. And we help clients determine what the need is that’s most important. What is the need? And then we find solutions for that need.
The solutions are very important. They’re very varied. They take into account tax law, estate law, finances, a lot of different aspects. But that’s what we do, and we go out, and we find the best solution for the client, at the best pricing for the client. And we’re their advisor. I also like to think of us as a partner with other advisors. It’s a team approach.
We’re going to work with you from the liability perspective, we’re going to work with a client’s attorneys and accountants to make sure that that plan is put in place with well documented agreements. And the insurance is the funding vehicle to make sure that those agreements actually happen.
Patrick: Now, when we talk about life insurance, and the excess disability, I mean, I’m coming from a perspective, a lot of us are, well, we’re not in our 20s anymore, but we’re still kind of in that invincible feeling that look, you know, nothing’s going to happen to me. I take care of myself. You know, why do I need it?
So when we have a conversation about life insurance, you know, we’ll start there. Let’s talk about, you know, what is it? How does it really work beyond what we may have perceptions of? And then beyond that, why is it even applicable for private equity, venture capital, those types of organizations?
Lynne: Yes. So let’s start by saying, you probably won’t need it. Hopefully, you won’t need it. But the issue is, if you do need it, and you don’t have it, an immense hardship is created. So what is the need? The need is to protect a business from hardship. Protect a business from a significant economic consequence of someone’s death or someone’s disability. For example, private equity.
Private equity, venture capital hedge funds, all of them really rely on an individual’s ability to make deals happen, invest, make those decisions. Unlike a lot of other, let’s say a manufacturing business, where you have a large team approach, these companies, private equity, hedge funds, venture capital, they really rely on individuals and their talents. So what happens if one of those individuals dies? Or is disabled? What happens to the company? And the problem is the economic consequences of that loss are quick.
So do we want to put a company in that position? No. Life insurance is a tax free cash infusion into a business to buy time, so that the business has the ability to make choices, have flexibility, and protect its economic viability and interests. And it’s great leverage. And private equity, hedge funds and venture capital, you guys love leverage. And we’re leveraging life.
Patrick: That’s interesting, because it is true that this is a people business. And if you’re investing in that person, what happens, God forbid, if that person is no longer there, suddenly and unexpectedly. So you know, the whole issue of succession and so forth.
Lynne: Right. I mean, we can look at history, and really see the effects of that. You know, GE, what happened, or when a fund manager leaves a fund, forget about dying or disability, they leave a fund, you know, the consequence to that fund has been significant. There’s also the publicity around it. Wouldn’t it be better to be able to report that there’s a death of a significant leader, and yet there’s a plan in place. That calms people. It’s when we don’t have again, I’m always gonna say choices, that people panic.
Patrick: Yeah. Now, I’m new to life insurance, because I’m kind of in my little silo with the M&A. I assume that every private equity firm has this key person coverage?
Lynne: Well, they should. But I have found that very few do. Because, interestingly, it’s not something that is discussed enough. You know, all the years I was in business, my accountant, my attorneys never once said to me, what happens if something happened to you? Do you have coverage in place to protect your employees, to protect your business? They didn’t.
And fortunately, I do this for a living, but we can’t necessarily expect our advisors to always be able to tell us everything. So my question to your clients is the following. Do you have a buy-sell agreement in place? Most have at least an agreement in place, but is it funded? So, you and I, Patrick, are partners. or I’m the queen of you know, private equity firm, blah, blah, blah. And I do have documents in place that talk about what happens should something happen to me.
But where is the economics of that? What if I am a 50% shareholder? Who gets my stock? If something happens to me, now, how are they going to pay for that stock? This provides the funding, the cash in a very tax efficient manner to make that agreement actually happen. That’s the key. Is it funded? And most people will say no to that.
Patrick: That’s, that’s a real simple thing to fill out. Okay. Well, let’s talk about engagement on this. What’s the process for somebody that now hears this and, you know, let’s take some action. What’s involved?
Lynne: So we’re gonna, first of all, if there is an agreement in place, let’s take a look at the agreement. And let’s now fund it. The agreement spells out what is to happen in what timeframe and oftentimes, even in what amounts. But let’s do that. Let’s get that agreement. And now let’s look at the life insurance marketplace to be able to underwrite life insurance on that individual or on a series of individuals.
So that that money is available to actualize the buy sell key person agreement. That’s number one. That process is not that difficult. It can take anywhere from 30 to 60 days. We have an underwriter on staff. So we do a lot of the preliminary underwriting ahead of time. And since I represent so many different carriers, there are options. So please, please don’t assume that you can’t get insurance.
You’d be amazed at who can actually get insurance. I’ve had 80 year olds get insurance. I’ve had people with heart disease get insurance. I’ve had people with cancer get insurance. So don’t just dismiss it offhand. So the process is looking at what the need is, and then finding the appropriate product, it’s not a one size fits all, to match that need.
Patrick: Okay, and then that’s just one of the things that we want to go and stress is as we’re independent brokers, you and I, there’s not one insurance carrier that we’re beholden to. We can go to the market, find the most favorable terms, most favorable pricing, and find out truly, where is the fit that makes this make sense. And you said, the process takes about 30 to 60 days?
Lynne: Depending upon how much information is needed, and how quickly we can get that information. I want to emphasize too, we’re talking about large fit death benefit amounts typically. It is very, very important that that application process go a certain way so as not to create issues in the marketplace. That’s critically important. So you need somebody that is independent, that has the marketplace to look at, because oftentimes it’s going to be layered, or there may be reinsurance involved.
We really try not to use reinsurance if we can help it. Also, there may be one carrier, somebody, this happens all the time. Somebody comes in with, example, I’m working on a buy sell currently, and one of the gentlemen has a lymphoma history. I went out to 12 carriers, four of them said they would take this client, and eight said they would not.
Lynne: Okay, so we will a lot of times with health issues do work ahead of time before that application is ever even submitted so that we have a plan in place, first. We don’t just throw applications out there, there has to be a plan in place on how to do this. We may apply to a carrier and they have a borderline diabetic, I see a lot of those now. And we don’t like the offer that the carrier gave us. We don’t agree with it. They’re not willing to budge.
We get on the phone, we call five of our other friends at the carriers and we have lots of friends at the carriers. And we get a carrier that says no, no, we’re comfortable with that. Boom, we’re going to shift that file over. So we’re doing all of that work in the background. Your clients are good at what they do, and we’re good at what we do.
Patrick: Yeah, I can just compare this to do it yourselfers who they hear an ad on the radio or on television think well, maybe we should go look at that. Not only are they limited in terms of how much coverage they can get, because we’re talking 20, 30, 50 million dollar limit policies here. Okay, so these aren’t the beginners that are out there.
And in addition to not being able to access that you could, you know, poison the well by putting in an application that really hasn’t been vetted by a professional who knows what underwriters are looking for, that can frame issues more favorably. And where they can answer the underwriter’s questions upfront. So it’s one less thing because, you know, you do not want to have a bad first impression with an underwriter on an application.
Lynne: Absolutely, Patrick. That is such a well put statement, because I don’t want to play defense. I want to be on offense.
Patrick: One of the other things that comes up because this is a more contemporary thing now, with legalization of cannabis. Instead of the common question in life insurance, smoker or nonsmoker. What’s the impact on cannabis?
Lynne: So actually, it’s changed so much in recent years. Most of the carriers now do not have an issue with occasional marijuana usage. What they do have an issue with is disclosure. And so I work with my clients and sometimes they don’t take me seriously. Sometimes they do. I tell them, please admit it. That’s counterintuitive. Please admit it, because they will not hold it against you if it is occasional.
But if you don’t admit it, and it shows up in a doctor’s records, now they will decline it because you haven’t been forthright. So if you haven’t been forthright, what else aren’t you being forthright about? And so it’s very, again, very important how you handle that situation, but it is not a problem at all. I also talk about with clients the impact of big data. When insurance companies are underwriting they are looking at big data.
So when you submit a claim for health insurance, they get access. Now, when you apply for insurance, they’re getting access to that. So if you choose to fail to mention the doctor, you just saw one time, this one comes up all the time for sleep apnea, because you didn’t like what you were being told. So you never went back to him. And you’re not going to tell anybody about it, they’re going to find out now.
And so you have to understand how it works, and how to get around all of these, you know, potential potholes. And let’s face it, Patrick, your clients are high stress Type A people, and they’re going to probably have some little issues and medication or whatever. That’s okay. We’re going to work with that.
Patrick: Now as we move from life insurance, because the reason why I enjoy speaking with you is, there are perceptions of life insurance and disability insurance. And it’s one of those industrial things that okay, it’s out there, we may never need it. But it’s kind of if you’ve got a little knowledge, but it’s not deep. What was interesting was excess disability, and the impact there because again, we’re talking about high net worth people here who are high revenue generators, and people are depending on them doing that.
And we have a lot of events for private equity, where they are in a single location either traveling together, annual trips, annual meetings, inviting a lot of key CEOs of their portfolio companies. You’ve got a lot of wealth, a lot of talent in one space. And what happens in that. And that really was a big eye opener for me. So let’s talk about excess disability.
Lynne: Yeah, that is a market that I definitely don’t think is being discussed enough. It’s a very specialized market. It’s typically handled by Lloyds of London. One thing to understand about this marketplace is the syndicators actually do the underwriting and the pricing. It’s not like life insurance, where Prudential has filed its products with all the states. The same product, same pricing. Excess disability is very much more specific.
Let’s give some examples. Fund manager, private equity partner, they become disabled and cannot work. How are they supplementing their income? Do they need to supplement their income? They may not need to supplement their income, they have enough wealth built up that they don’t. However, they haven’t died. So that key person coverage hasn’t paid out. But the business is still suffering, because that leader is no longer there to work.
Or there’s partners, they haven’t died. So they technically are still his partner. And nothing destroys relationships faster than the absent partner. So what this allows, this disability coverage, is payment liquidity, again, to have the choices and flexibility so that that partner is paid out so that they’re no longer a partner. Even though they haven’t died, they’re disabled. So there’s a buyout.
Or the partner, perhaps he wants to have excess disability to supplement his income. Those are two areas that are looked at quite a bit for key person executives, partners, individual and we call it a disability buyout. There’s also business overhead expense. You know, let’s say it’s a small venture capital firm, maybe one partner, a sole proprietor, but he’s got staff. What happens then? Well, we also have the ability to do what’s called business overhead expense.
It’ll pay the expenses of the business, while that person is disabled, because they may come back. So there’s a permanent disability, and a temporary disability. We can take, we can account for both types of scenarios. There’s kidnap and ransom insurance. You’re traveling to Mexico, your whole team, and you’re worried about that. And we can provide that coverage for that trip only.
Patrick: Yeah, actually, that’s coming up more and more because Mexico is becoming the affordable alternative to going to Hawaii. And they’re saying, well, we’re only going to go to a resort but again, you’ve got some very key people and you will get a bunch of them in one spot at one time. And I can tell you on the kidnap ransom side, it’s a negligible cost. It’s less than $1,000 per person for the event or whatever. Is there, because we can’t get into this without you know, some addressing cost. With the excess disability, give me a scenario on okay, how much limits would you think, ballpark cost. Things like that for context.
Lynne: Yeah. So on the disability, I have access to up to $500,000 a month. I’ve got key person disability up to $75 million. I’ve got buy-sells up to $50 million. A lot of it depends on the individual, the business on the kidnap and ransom, where are they going? Are they traveling to Syria? I mean, you know, things like that. So it’s, I can’t really quote $1 per 1000. It depends on age, depends on health.
So but the key is on the, on these more unique boutique type of coverages, kidnap and ransom, accidental deaths. So for example, if you have a partner who can’t get any insurance, they’re completely uninsurable. I can still get them accidental death within hours, you know, without any underwriting. It’s expensive, but a lot of times, keep in mind, if you are borrowing money, if you have deals that are requiring something like this, I have the solutions.
Patrick: We’re coming up on, you know, summer travel season and everything right now. Okay, what’s the lead time for these coverages to get underwritten in place? Because we got a lot of these are event centric.
Lynne: Yeah, please don’t give me 24 hours, even though you know, it has been known to be done.
Patrick: Theoretically. It’s the same thing with M&A insurance, yeah.
Lynne: As soon as you know, let’s talk about it. Or if you’re planning something, let’s talk about it. But any time you are traveling, I don’t care what the reason is for it. Pleasure, business, you are traveling with other key people in your company, you should be looking at this coverage. Period. And this is interesting, Patrick, I am going next summer with my family on a trip. And my two sons are my succession plan. I have a succession plan in place, I have buy-sell, and I’ve done this myself, I am a business owner.
But we’re all going on the plane together. And we all said we need a one time coverage for that plane trip going and coming. That would protect the company because all three of us are going to be on the plane together. We don’t want to fly separately. We can buy this coverage, and that way my company would be taken care of if God forbid, something happened to the three of us.
Patrick: Well, I don’t think we’re in the class of either the President or the first lady or the king and the queen where their protocol requires separate planes. The other thing that a lot of people take for granted is more and more private planes are being used for transport now. And while you know, flying is still safer than driving. There are a lot more small planes up there, and a lot can go wrong. And you’ve got a lot of people and a lot of eggs in one basket that can be a challenge.
So thank you very much for that, Lynne. That was one of the things that I hadn’t even thought about. Those are the great perspectives that we get when we sit down and talk together. That’s why we’re so excited to have you here. Now, as we’re looking into this year, what trends are you seeing in the life insurance front? The benefits front? What do you see out there that we should, you know, look out for us as this year goes on?
Lynne: There’s two very important areas, let’s first you know, focus on business. The business marketplace is really critical, because as we started our conversation, not very many people have actually funded their business planning. And so that is a very, very big focus for the industry. All of your clients are going to be getting bombarded with information about have you done this, have you done this? And I think it’s important because they trust you, you’ve handled their insurance in the past, that you are a natural person for them to go to.
Patrick: And they’re not getting any younger.
Lynne: No, they’re not getting any younger. You know, I think that the low interest rate environment has been very challenging for the life insurance companies. So you have seen products changing quite a bit. Not so much term insurance and a lot of what we’re talking about is a term insurance product. But the permanent products for deferred compensation, for golden handcuffs. You have a key executive on your team.
You want to retain them. There’s a lot of really interesting planning opportunities for utilizing life insurance and the tax advantages of the investment income to help lock someone into you for a longer period of time. But those products have been, they’ve changed quite a bit because of the low interest rate. I am conservative.
And when I do planning for clients, I am only going to illustrate conservatively, because I want this to be there 40, 50 years from now. There is a lot that was done in the past with premium finance, and I’m sure a lot of your clients have been involved or have heard about financing the premium. It is not as beneficial today, because interest rates have jumped up. Okay, so you don’t have the leverage.
But if any of your clients, any of them bought insurance in the past, with a premium finance strategy, I would like to at least review that. It is an asset, and assets need to be reviewed on a routine basis. The reason is, the loan interest is going up. And the features, or the assumptions in the life insurance product, are going down. Therefore, the collateral requirements are changing rapidly. And I am finding more and more clients who bought these policies now having to post more collateral.
Patrick: And you can facilitate transition out of those?
Lynne: I can facilitate possibly refinancing. But most more importantly, we have been more than I thought, facilitating getting out of the premium financing structure. So that is an important marketplace. And the third one is estate planning. Let’s not forget, your clients are wealthy. Today, we have a very large 25 million-ish exclusion. That exclusion is gone in 2025. It will sunset.
Now, it’s going to zero technically, but that something will, there will be some sort of a compromise in 2025. But who knows what the election is going to hold. And so you know, somewhere between zero and 25 is probably the number. Our guess is it’ll end up somewhere in the $10 million exclusion range. What that means is those people who have a net worth of 10 million to 25 that thought all these years that they didn’t have an estate tax issue, they are going to have an estate tax issue.
And there’s no better way to solve that than with life insurance, because it’s again, a tax favored structure to pay estate taxes. So it’s something people should be looking at today not waiting till 2025 because they may not be healthy in 2025.
Patrick: Yeah, I think if you wait until there’s definitive direction, you’re going to see the lines and the capacity of all the experts out there that can help do this all dry up. Because we’ve had situations before when there’s a run up in mergers and acquisitions. At the end of 2021, you couldn’t find an attorney, you couldn’t find an accountant, you couldn’t find an insurance company available because all of those resources have been taken up.
Same lap in here. So I think sooner rather than later is always good. Lynne Rosenberg, it’s been great to have you. If my clients or our listeners wanted to speak with you, what do you recommend is the best way to reach you.
Lynne: I would like them to reach out to you Patrick. You are their relationship, their connection, and I am your partner and we’re a team. And so if they reach out to you, I’m there to support you and them and find their solutions.
Patrick: Absolutely. So if you want these things looked over please reach out to me, pstroth s t r o t h @rubiconins.com. You can go to the website rubiconins.com. Reach out, you will get responded to the same day or 24 hours and we’ll definitely get a conversation started and get you connected with Lynne. Lynne, thank you so much for being here today.
Lynne: Thank you so much, Patrick. It’s been a pleasure.