Tag Archives: life insurance

Celebrity Chefs

 

Chef Julia Child became a pop-culture icon and was one of the first true celebrity chefs.

She brought French Cuisine to the American Public.   Her debut cookbook was Mastering the Art of French Cooking.   As a result, Julia Child’s kitchen is a historic artefact. It is on display on the ground floor of the Smithsonian Institution’s National Museum of American History.  The kitchen is the actual kitchen used in several of her cooking shows.

Iron Chefs is a show produced by Food Network.  It also carried a dubbed version of the original Iron Chef.  Like the original Japanese program, the program is a culinary game show.  In each episode, a new challenger chef competes against one of the resident “Iron Chefs” in a one-hour cooking competition based on a secret ingredient or ingredients.

Celebrity Chefs are treated like rock stars.  Gordon Ramsay’s empire is reported to be worth $80 million.  His salary per episode is $225, 000.   He earns an additional $10 million per year from his media and restaurant empire.  Ramsay has opened a string of successful restaurants across the globe.  He also has a global partnership with WWRD (Waterford, Wedgwood, Royal Doulton) which offers quality home and lifestyle products.

Jamie Oliver is worth a whopping $243 million beating out Gordon Ramsay and Delia Smith. In 2000, Oliver became the face of the UK supermarket chain Sainsbury’ through an endorsement deal worth $2 million a year.  In 2005 Oliver suggested that home cooks grate nutmeg over spaghetti bolognese.  This led to the supermarket sell more than 9 tons of the spice.  The tie-up which lasted 11 years is over but has earned the chef over over £10 million.

The kitchen is quite a dangerous place for celebrity chefs:  knives are sharp, pans are hot, floors are slippery.

There is the specific timing involved in a television show.  What happens if a celebrity chef is ill or injured and therefore unable to perform?  How does this affect the overall brand and the businesses that rely on their names?

The response of investors and corporate risk managers is to secure large blocks of key person life insurance. This is to protect against the untimely death of celebrity chefs.   They recognise how dependent the franchises are on the brand of their celebrity chefs.  Many risk managers ignore the greater risk of injury and forgo disability coverage.

Key person life and key person disability insurance should be procured. This is in order to protect the company, the employees, the shareholders and the board of directors.  Production and merchandising partners need similar protection as well.  This insurance is typically available through traditional life markets.

Accidents and illnesses happen.  Alton Brown, a chef who is a known aviation and motorcycle enthusiast, broke his collarbone after crashing a motorcycle while filming an episode of Feasting on Asphalt for Food Network.  A few years earlier, he shattered his wrist.  This injury required eight screws and a titanium plate to repair.  This furthermore took months of recovery and rehabilitation before he could resume filming.

Lower-profile chefs need similar protection.  The Gotham Bar & Grill in New York enlisted the talent of Alfred Portale.  He has brought the cuisine to a new level.  Furthermore he continuously evolves the menu, dining room, service standard and art collection.  Chef Portale was named Outstanding Chef in the nation in 2006. If Chef Portale suffered a serious injury or illness, there is definite potential for Gothams to be negatively affected. 

Key person life and disability insurance is  important.  This is therefore to either reorganise and replace a fallen chef, or simply wind down a venture.

The value of ensuring that a brand or restaurant can continue to prosper if an executive chef is no longer able to perform, is big business.  Cooking shows like Iron Chef, Masterchef, Top Chef and Hell’s Kitchen promise to spawn new superstars that have strong brand crossover. Celebrity Chefs have ascended to a lofty perch once inhabited only by actors, athletes and rock stars and ensuring there are contingency plans in place makes good business sense

Buy-Sell Agreements

A buy-sell agreement, also known as a buy-out agreement, is a legally binding agreement between co-owners of a business. Such an agreement stipulates the rules of the situation if a co-owner dies or is forced out of the firm or chooses to leave the business of his/her own free will. In simple terms, it may be thought of as a sort of premarital agreement between business partners and is sometimes referred to as a “business will”.

The purpose is that the business can continue to operate with as little disruption as possible for the surviving business owner (s), as well as ensuring that the estate of the deceased business owner receives fair value for his/her business interests, as well as settlement of the credit loan account.

Where a business is held in a trust (or a corporate entity such as a company) the reality is that even though the trust or corporate entity can continue to hold the business interest in perpetuity, there is often only one of the trustees/shareholders who is directly involved in the business, who influences the success of the enterprise and upon whose death and thus, in all likelihood, the trust or entity would no longer wish to continue to hold its interest in the business, as it would not make commercial sense to do so.

Why it is important for the surviving business owners’ perspective to have a buy and sell arrangement in place.

1. The surviving business owners may want to buy the deceased’s interest in the business, but have to raise finance to do so. Therefore they will be paying interest on the finance raised which would mean that over time they will be paying more than the original purchase price of the business.
2. Should the surviving business owners not manage to raise finance to purchase, it could mean that the deceased’s spouse and/or dependents would become co-owners. They may not have the skills or expertise to be of value and would be a drain on the business.
3. If the deceased as co-owner had a credit loan account, this must be settled on his/her death and if there is insufficient liquidity in the enterprise, this could present a serious problem.

Implementing a business assurance arrangement

1. The business’s accountant or auditor should establish the value of the business.
2. If credit loan accounts are to be included in the buy and sell arrangement, these values should be determined.
3. In order to purchase the respective business interest in the business, life cove and/or disability cover is required.
4. To make a proposal in respect of the buy and sell arrangement the business owners, details of their marital regime must be established.
5. All the necessary documents to obtain life/disability cover must be completed in full at the Life office.
6. A formal buy and sell agreement must be drawn up and signed. It is critical that the parties do enter into the buy and sell agreement, as they need both of the signed agreements and life insurance in order to have a binding and effective buy and sell arrangement.

In an entity purchase buy-sell agreement, the business itself buys separate life insurance policies on the lives of each of the co-owners. The business usually pays the annual premiums and is the owner and beneficiary of the policies.

In a cross purchase buy-sell agreement, each co-owner buys a life insurance policy on each of the other co-owners. Each co-owner usually pays the annual premiums on the policies they own and are the beneficiaries of the policies. If your company has a large number of co-owners, multiple policies must be purchased by each co-owner. A wait and see (or hybrid) buy-sell agreement allows you to combine features from both the entity purchase and cross purchase models. The business can buy policies on each co-owner, the individual co-owners can buy policies on each other, or a mixture of both methods can be used.

The buy-sell agreement should be fully funded

The amount of insurance coverage on your life should equal the value of your ownership interest. Then when you die, there will be enough cash from the policy proceeds to pay your family or estate in full for your share of the business. But if all that is affordable is insurance coverage for a portion of your interest, you might want to go ahead and fund that amount. Later the company may be able to increase the amount of insurance or use additional funding methods. In the meantime, the agreement should specify how your family or estate will be paid.

The Value of the business could change overtime

What if the insurance proceeds turn out to be less than the value of your business interest, due to growth in the business? Your surviving family members might end up getting less than full value for your business interest. Your buy-sell agreement should specify how the valuation difference will be handled.

Conversely, the insurance proceeds might be greater than the value of your business interest when you die. Your buy-sell agreement should address this potential situation upfront and specify whether the excess funds will belong to the business, the surviving co-owners, or your family or estate.

Should Group Life Insurance be used?

Using a company’s group life insurance plan to fund a buy-sell agreement is generally not recommended. Normally, group life insurance premiums are tax-deductible to the company. But premiums are no longer deductible if the business is the beneficiary.

Possible negative tax consequences

For policies issued after August 16, 2006, the death benefits of life insurance on the life of an employee payable to the employer/policy owner may be subject to income taxes unless an exception applies.

Assume your business is a corporation or is taxed as one. When one of your co-owners dies, his or her estate becomes the owner of the insurance policies covering you and the other co-owners of the business in a cross purchase agreement.

If these policies are then transferred to the surviving co-owners to pay for future buyouts, a transfer-for-value (gain) may occur, and a portion of the proceeds received from the transferred policies may be taxable.

If a policy is cancelled (surrendered) for cash to buy out your interest while you are living, any gain on the policy is subject to federal income tax for the policy owner. Gain includes all policy loans outstanding at the time of surrender. Also, the policy may carry surrender charges.

Keeping track of your buy-sell agreement

Each year, the premiums on the policies must be paid, or the insurance will lapse. So monitor premium payments carefully. Your buy-sell agreement should include a feature requiring ongoing proof of payout . Also review the amount of insurance regularly. The insurance coverage may have to be increased periodically to reflect increases in the value of the business. Finally, periodically check the financial rating of your insurance company. The policies funding your buy-sell agreement will do your family no good if the insurer becomes insolvent.

 

Term Life Insurance

This type of insurance provides coverage at a fixed rate of payments for a limited period of time, the relevant term.  When the relevant period expires, coverage at the previous premium rate is no longer guaranteed.  The client must either forfeit coverage or apply for further coverage with different premiums and/or conditions.  If the life insured dies during the term, the death benefit will be paid to the beneficiary.

Term insurance is the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis over a specified period of time.  Term insurance is not generally used for estate planning but is used for pure income replacement needs for an individual.  Some policies offer a feature called guaranteed insurability that allows the insured to renew the policy without proof of insurability.

Usage

The primary use of term life insurance is to provide coverage of financial responsibilities for the insured or his or her beneficiaries.  These may include consumer debt, dependent care, university education, funeral costs and mortgages.

a)  Annual Renewable Term :

The simplest form is a term of one year.  The death benefit would be paid by the insurance company if the insured died during the one year term, while no benefit is paid if the insured dies one day after the last day of the one year term.  The premium paid is based on the expected probability of the insured dying in that one year.  A challenge to renewal experienced with some of these policies is requiring proof of insurability.  For instance, the insured could acquire a terminal illness within the term, but not actually die until after the term expires.  As a result of the terminal illness, the insured would likely be uninsurable after the expiration of the initial term, therefore unable to renew the policy or purchase a new one.

Some policies offer a feature called guaranteed reinsurability that allows the insured to renew without proof of insurability.

The period for this type of insurance varies from 10 to 30 years.  As the insured ages, the premiums increase with each renewal period, eventually becoming financially inviable as the rates would eventually exceed the cost of a permanent policy.

b)  Level Term Life Insurance:

In this instance the premium is guaranteed to be the same for a given period of years, commonly 10, 15, 20 and 30 years.  The premium paid each year remains the same for the duration of the contract, however, the longer the term, the higher the premium, because the older, more expensive to insure years are averaged into the premium by the insurer.  Renewal options may or may not be included and the insured should review the contract to see if evidence of insurability is required in order to renew a policy.

c)  Options:

Most term policies include an option to convert to a Universal Life or Whole Life Policy.  A person who acquired the term life policy with a preferred rating class and later is diagnosed with a condition that would make it difficult to qualify for a new term policy would be able to use this option.

d)  Return Premium Term Life Insurance:

This provides a return of some of the premiums paid during the policy term if the insured person outlives the duration of the term life.  The repayment would be less the fees and expenses which the insurance company retains.  The premiums for a return premium term life plan are usually much higher than for a regular level term life insurance policy.

Cost Difference

Both term and permanent insurance use the same mortality tables for calculating the cost of insurance.  The premium costs for term insurance are substantially lower than those for permanent insurance.  The reason for lower costs is that term programs may expire without paying out, whereas permanent programs must always pay out eventually.  To address this, some permanent programs have built-in cash accumulation vehicles to force the insured to “self-insure” making the programs many times more expensive.

Conclusion

Insurance industry studies indicate the the probability of filing a death benefit claim under term insurance is as low as 1% of policies paying the benefit.  Term insurance may offer more coverage per premium dollar – by a factor of up to 10.

“Although there are many kinds of insurance (such as whole or universal life) the only type you need is Term Insurance, because it is simple and affordable. Use the “rule of 20” to determine the death benefit.  You want the beneficiary to be able to invest the payout and live off the income, so he or she does not have to worry about tapping into the principal.  That means the death benefit should be 20 times the annual income you need to replace.  If the goal is to replace $50,000 in annual income, you would want to buy a $1 million policy.” – Suze Orman on the SelectQuote Blog.

Highest Movie Insurance Claim

When Paul Walker was killed in November 2013 in the midst of shooting Fast and Furious 7, it was clear that the actor’s untimely death in an horrific car accident would trigger by far the largest insurance claim in Hollywood’s history.

Having had a major role in the majority of previous films in the series, the loss of Paul Walker meant that the film itself had to undergo major revisions – these included rewrites, a halt on production, a larger investment in special effects, and hiring three new actors to play the part of Walker’s character.  When it came to figure out how they would account for the absence of Walker, the film’s producers and director agreed that they would keep Walker’s character in Fast and Furious 7, considering a substantial number of his scenes had already been filmed.  To do so, they opted to have a computer-generated version of his face superimposed onto other actors.

In total, three people took turns in handling Walker’s role, two of which are actually Paul’s brothers and another one being an actor of similar height and physique.  The employment of three individuals to cover the role of one person, as well as the associated cost for creating a believable CG version of Walker’s face all added to production costs.

In addition to this, the amount of time that was spent halting production while figuring out how to handle the film without Walker added around $1 million a week to the production costs.  Between the new actors, the CG, delays and other associated costs, increased the film’s budget by 25% from its original $200 million to $250 million.  Because this additional $50 million has been the result of an unforeseen tragedy, the studio is looking to claim it on insurance.

While the claim is yet to be officially paid, its more likely than not that it will be.  If so, the $50 million claim will prove to be the biggest approved insurance claim in Hollywood history.  While it may prove to be a lot of money in terms of Hollywood payouts, it could have been much bigger.  If the studio had chosen to completely rewrite the film and remove Walker’s character from it entirely, then the additional production costs could have amounted to the same costs of the original budget.

In the past, the passing of Hollywood stars have required sudden changes to film production.  The next instalment in The Hunger Games film series will also see some changes as a result of Philip Seymour Hoffman’s passing. While it was suggested that a computer-generated version of Hoffman’s character would be used to fill in any remaining scenes, the film’s director has stated otherwise.  Instead, he noted that already-available footage of Hoffman will be used where necessary.