Lesson 7: Business application of life insurance
Key person insurance, where a company insures one or more key persons
Insured: key employee
Ex. Company run by Jane (sales/marketing) and Sally (production/finance). If one of
them dies, there will be losses. So they get the company to insure them both for
In event of death
States that survivor must purchase shares of deceased’s estate.
Needs to be funded with life insurance. Jane would take out policy on the life of Sally
(Jane= beneficiary). Sally would take out policy on the life of Jane (Sally=
beneficiary). Each policy would be worth $500k.
In event of disability
Allows the second partner to purchase the shares of the disabled partner.
In event of dispute
- The disgruntled partner (who wants to be the sole owner of the company)
would make the first move .
- They give writing notice stating: “on this date, I give notice of intent to
purchase your shares for $________”
- Once notice is given, within 30 days, there will only be one owner of the
- The person given the notice makes the decision: Will they sell their shares?
Or buy the disgruntled party’s shares? (same price)
- There are no counter-offers
- The only thing that could stop the deal is if one of the parties don’t have the
Rule of 72
-How long does it take money to double?
depends on investment return/interest rate 72= 3% x 24 years The smaller number is the interest rate. The
72= 4% x 18 years
72= 5% x 14.4 years bigger number tells you how many years it will
take for your money to double
72= 6% x 12 years
Ex. with a 6% interest rate, and $50,000: (doubles every 12 years)
Inflation has averaged 2% over the last 5 years
Inflation has averaged 3% over the last 40 years
Prediction: over the next 60 years, it will average 3%
The cost of inflation makes everything more expensive, while savings stay the same.
So if you have $40,000 in your retirement fund at 60 years, and the inflation rate is
3%, by the time you’re 84, your money will only be worth $20,000.