Protecting your Business using tailored Life Insurance

By August 21, 2013Insurance
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Protecting your Business using tailored life insurance

 

Funding buy sell agreements is a major decision for any company.  This often complex legal document is designed to ensure that a deceased partner’s spouse can’t assume the role of said partner upon their death or disability.

In the vast majority of cases, neither does the surviving spouse want any part of their partner’s business, nor would the remaining partner particularly welcome their deceased colleague’s spouse being involved in the business they created.

What both parties do want is a fair settlement and continuity.

The surviving spouse want’s the value of the business they’re entitled to; the remaining partner wants as little disruption to the business as possible.  To satisfy both, life insurance is often the easiest way to fund buy sell agreements.

In its simplest terms, a life insurance policy is taken out on each of the shareholders, either corporate or personal, and is used to buy the shares of a partner in the event of their death.  The spouse gets the value of the shares, the partner or business regains the shares.

“The secret of getting ahead is getting started. The secret of getting started is breaking your complex overwhelming tasks into small manageable tasks, and then starting on the first one.”

- Mark Twain

Are buy sell agreements right for my business?

In our enlightened, hyper-connected age, new joint ventures and partnerships are created every day. Some maybe flash-in-the-pan projects, others may be the beginning of a life-time working relationship. The last thing on each of the partners’ mind is “what would happen in the event of [new partner]’s death?” But life happens and very often when we’re not expecting it.

Funding buy sell agreements without life insurance in place wouldn’t be easy, especially if the business is a new venture that has raised funds in the private sector to support its growth and that investment assumes that both (or all) parties will survive to bring the project to fruition. It’s even advisable for a sole proprietor of a business to consider a buy sell agreement if their partner has no intention of running the business in the event of the owner’s inability to do so. Rather than naming a shareholder, in this instance employees can be chosen by the owner to accept the gauntlet of running the business after they’re gone.

Personal or Corporate life insurance?

If the partnership is a straight forward two-person venture, both partners are of a similar age and fitness and play equally important roles in the business, a personal life insurance policy taken out on the other party should be both fair and adequate. When there are a number of shareholders involved, the chances are that they will be of differing ages, backgrounds and stages in their lives.

This would mean that if personal life insurance policies were taken out, the premiums would reflect age disparity and possibly other factors such as health, too. When this is the case, a corporate life insurance policy created to fund buy sell agreements would perhaps be more advisable. By agreement, contributions to maintain the buy sell agreement would be set pro-rata to reflect age discrepancies and company standing (perhaps indicating how many shares from the deceased’s passing each contributor would receive) so that it remains fair to all culpable. Your solution is provided on an individual basis.

How do I buy a buy sell agreement funded policy?

 

As you’ll have noticed throughout this overview, there are many ifs, buts, perhaps and maybes. That’s because no two partnerships are alike and buy sell agreements are extremely specific to each business and each shareholder who has a stake in it. As these are legally-binding contracts, a lawyer will have to oversee the agreements; if there are a number of shareholders, probably more than one lawyer will have an interest.

A financial advisor (ie Us) will also need to be consulted to recommend the best-fit policy for the circumstances as well as outline the cost, longevity and implications should one of the partners suddenly be unable to continue with their role in the business. With so many parties involved in the agreement’s creation, it can take time; the cost will obviously reflect that effort. However, it’s an extremely worthwhile consideration to make and no privately owned business should be without such an agreement.

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“You miss 100 percent of the shots you never take.”

- Wayne Gretzky

So let’s recap,

Lets review the benefits of funding a buy sell agreement using life insurance could give your business in the long term:

  1. Guarantees that the shares left by the deceased partner can be bought at a price that reflects their true value
  2. Provides an irrefutable agreement between the company and the heirs for the disposal of the equity in the business
  3. Ensures that the funds needed to buy the shares don’t have to be found from within company coffers, which may affect liquidity and business plans
  4. Reinforces to staff, creditors, customers, suppliers and potential investors that the business remains a sound proposition and their investment is safe

When a partner in a business dies, the last thing either the surviving spouse or shareholders want is wrangling over what happens to their shares.  Funding a buy sell agreement using life insurance is a one-stop solution to that problem.

If this is an agreement that you and your partner(s) are expressly interested in, please call or e-mail us today to ask any questions you may have or arrange an appointment to discuss your precise circumstances further.

 By Steffen deGraaf

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