Bonding and Key-Person Coverage
Working capital is a key metric used to support the bond requirements of a business that has surety needs. Having a strong financial picture, including strong and stable income, improving cash flows, and an appropriate level of conservative liquid assets can go a long way when determining limits for your bonding program. Outside of the equity built-up in your company since its inception, cash and cash equivalents are critical in setting up your bonding program. The problem with these liquid-type assets is that they are typically low yielding, earning well below 1 percent in a traditional bank format. Cash value life insurance is an alternative many use for potentially higher yields as well as providing other key benefits as protection to their business, which all may serve as benefits to their bonding program.
Life Insurance: An Ideal Bonding Asset
Life insurance can be an excellent source to generate cash equivalent bonding assets and provide key protection to your businesses greatest asset: the people running it. The cash-value building within a permanent life insurance policy often has interest rates earning well above what a bank account can provide. Correctly structuring these policies within the business may provide a liquid-form asset on your balance sheet, and a cash equivalent asset for contractors that do bonded work. It is important to understand the contractual language of these policies (i.e., surrender charges in early years) to evaluate the potential benefits and any negatives. Over time, these policies may provide net surrender values that match or exceed the premiums paid, making it an appreciating asset over time.
Death Benefits in Excess of Bonding Requirements
It is important to understand that one unique benefit of these policies relative to other conservative assets, is an immediate benefit payable to the business, usually worth many times the underlying cash surrender value, in that case of death of the insured. When structured properly, these death proceeds are a tax-free benefit to the business and may be key protection to a business that does financially guaranteed, or bonded, work. The death benefit becomes available immediately to the company to help with the costs of completion of any outstanding jobs.
Questions to ask:
- Is the cash surrender value of your existing business-owned life insurance — typically on a company’s officers or key-personnel — counted as liquid working capital by your surety?
- Do you have life insurance on these key-people at your business, but it is not owned by the business? Who pays for it? Who owns it? Who is the beneficiary?
- Has your bond agent discussed the options here and how they impact your bond program?
Our view as a Direct Surety at Granite
- As a wholly owned subsidiary of Federated Insurance®, Granite Re, Inc. counts the cash value within a business- owned life insurance policy as working capital.
- Insuring the lives of key personnel at a company can have a positive impact on surety underwriting in determining limits and rates.
- We own both our insurance company and our surety. We act directly — no broker or middle-person — so we can properly set up these types of policies to help meet the goals our customers have for both insurance and bonding needs.
To start the process, a contractor will fill out a simple questionnaire and provide personal financials, business financials, or tax returns to their surety professional. An initial analysis will include a no obligation discussion about your business and its goals. For more information on how Federated can help you with surety bonding, please contact us to discuss.
Federated Mutual Insurance Company is PCA’s exclusive partner for property and liability, workers compensation and financial protection services. A leading national carrier specializing in the insurance needs of contractors, Federated offers property and casualty, workers compensation, life and disability income, and bonding through Granite Re, a wholly-owned subsidiary. For more information, contact your local Federated marketing representative or call senior national account executive Nate Oland at 1-800-533-0472.
*Bonds are underwritten by Granite Re, Inc, a wholly-owned subsidiary.
*Granite Re, Inc. Dba Granite Surety Insurance Company