Successful business owners need ways to protect their companies, compete for top talent, reward employees and plan for a financially secure future. An excellent financial planner understands these needs and know the various roles insurance play in these situations. This is the "bonus success" story after I finished a 5-part series dedicated to businesses and the role of life insurance in solving some of the concerns of business owners.
I wrote about Buy-Sell Agreement (for those with business partners) here Insurance for Businesses Series: Buy-Sell Agreement | Peach Insurance Services
Before reading on, I suggest you read that post first to understand the fundamentals of buy/sell agreements as well as the role of life insurance with succession planning.
What happens if you do not have a business partner and/or you are a solo practitioner? What about if you are not ready to pick your successor but you know that you need to do an emergency exit planning?
Do not worry. If (your client) or you own your business 100%, you still have the option to use life insurance as your funding vehicle.
I find it fortuitous that we (together with a cadre of awesome emergency exit planning experts and legal team) recently helped a very successful financial planner with her emergency exit planning as soon as I had just wrapped up a blog series on insurance for businesses. Our successful financial planner client owns her business 100% and she's not quite ready to pick her successor but she understands the importance of emergency exit (e.g. what happens if she got hit by a bus tomorrow?)
After doing a thorough analysis of what is available on the marketplace and our client's very specific needs, we honed in on a particular carrier that allows us to combine a buy/sell strategy with split dollar endorsement. Concurrently, our client found an emergency exit planning partner/match (aka buyer of the business).
Make sure you read about my post on Split Dollar here Insurance for Businesses Series: Split Dollar | Peach Insurance Services
It goes without saying that combining two complex strategies require meticulous planning and analysis. It has a lot of moving pieces and all stakeholders must be able understand the complexities of each part as well as how they work together. In fact, only specially trained insurance advisors are able to offer this option to clients.
Our client also did not want to go through underwriting again in the future and wanted to make sure that we take into consideration her company's future growth, which historically has been 20% each year. We were able to deliver as she wished! Therefore, we were able to secure a life insurance policy that covers her current business valuation plus 20% growth estimated for the next 10 years. Bonus: she was issued at preferred rates! Now, that is what I call the magic of underwriting.
At the end of the day, once the strategy is executed and if she were to pass away while the life insurance policy is inforce, her heirs would be receiving the equivalent of the life insurance proceeds regardless of what the business valuation states (in her case, it's about 8X the amount of the current business valuation). Equally important is that she did not have to name her successor today. She can pick her successor within the next 15 years and not worry about what happens to her business if she got hit by a bus tomorrow. Bonus: our design also gives her the flexibility to change "emergency exit strategy partners" as needed.
Again, let's review her options to fund her buy/sell agreement:
- Using life insurance proceeds to pay the surviving spouse or family
- Taking funds out of the business to pay the surviving spouse or family
- Using owners' own cash/savings/investments to pay the surviving spouse or family
- Taking a commercial loan to pay the surviving spouse or family
- Give the surviving spouse or family a note – aka promise of future benefit to the survivor
- Allowing the spouse or child to take the deceased partner's place in the company
Like I've said in the past, failure to plan is a costly mistake. Our financial planner client chose life insurance as her funding vehicle. You may choose any of the above - but whatever it is - you must get this planning done sooner than later.
Without proper advanced planning, the death of a business owner can result in many costly consequences such as: fire sale of the business assets, lost of primary source of income for the surviving family, demand by creditors for debt settlement and possible need to liquidate estate assets to pay business debts.
There is no better time to think about emergency exit and/or succession planning than today.
If you are a fee-only planner, advisor or a client and would like to know more about this topic, please email me at firstname.lastname@example.org
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