Key Man for a small business
- Thread starter wcShaver
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- key man life
- 2,152
Used this way it screws the family of the owner A or B, the one that dies. If you are okay with by saying that the surviving family is "dead weight", and should be screwed so be it.
G
Guest
Guest
I fail to see your logic.
I've been in biz for myself for 30 years. I can tell you that most spouses of owners who have partners do NOT want to be part of the biz. And surviving partners don't want departed partner's spouse there either.
My stepfather owned a $1M+ wholesaling biz with a partner. When my stepfather had a stroke and died suddenly at 64, the surviving partner got a BIG check from the insurance company (buy-sell policy they each had on the other) and gave it to my mother in return for her stock. He then owned the biz free and clear, my mother got out of a responsibility she never wanted... with a ton of money... everyone was a winner.... and the cost of the policy was not that high... and paid by the business as I remember (It was 20 years ago.) My mother is 80+ now, invested in safe-money issues (solid munis, and a few funds) and lives without financial worry in Palm Beach, FL.
I'm a huge believer in life insurance.
Al
- 7,790
I must agree with somarco and al that keyman insurance is an excellent product. I can't see how either party is screwed. The surviving spouse could turn around and offer the proceeds to the surviving partner to buy out the business from that partner. I believe it is a win-win situation for all parties concerned.
Agent Jeff
Expert
- 80
Somewhere in this thread the question on key man insurance started to get answered with opinions on buy-sell agreements. The reason for each is different. Key man insurance is to survive temporary business difficulties due to loss of management talent and life insurance in a buy-sell is to provide liquidity so the company can buy out the interests of a desceased partner who can no longer contribute his talents.
NWInsurance
Expert
- 85
This started with the original post. WcShaver wants info on Buy-Sell but called it Key Man.
I would also mention that not all buy sell can be deducted by the company. This would depend on if it was an entity buy sell or not.
The question was really asking which type of Insurance would be best to fund this agreement, and if life insurance is even a good choice.
There are other options but for a smaller company who does not have huge cash reserves life insurance is in many times the best engine. If you are using a entity to purchase the insurance then it does not matter, but if each owner is purchasing on each other, then as mentioned above one of the people could get shafted as they have to pay more for the insurance if their partner is older.
I would also mention that before you even start on this process you should do your homework as there are many options and you would need to see if a entity cross-purchase would be best.
Once you discover that then the type of policy can be perm or term. We have done some VUL (BAD RAP BECAUSE PEOPLE SELL IT WRONG) but I would only do that if you max fund on a option 2.
Term may be a good product, but if the owners are older it may be extremely costly.
I defiantly think that before you work to hard on this one you need to at least get the basics. I am sure that your broker has some info that you can look over.
For instance if there are 3 owners on a entity plan there would be 3 policies. Each on a owner, each owned by the company. On a cross-purchase there would be 6 policies. Each owner would purchase a policy on the other 2 owners.
As was maintained this is all to allow those owners to continue the business without taking on a new owner (the old owners family)
This plan is formulated by the owners/partners etc. with a set value for their share of the business. These plans can be great for agents as they can provide a constant stream of applications as the business grows.
For instance in a cross purchase lets say that the business is worth 900k with 3 owners. Each owner would purchase 150K on the other 2. If one dies each owner would then pay 150K to the deceased family giving them 300k.
As the business grows this plan changes, and if you are a good agent and keep up with the client you will find that they will need to continually update this with more insurance as the company grows. No churning needed as this is just how this way of funding a insurance plan works.
If perm insurance is chosen, then there are ways to allow the owner to take the insurance with him once he retires, while the company was able to pay for the insurance while he was in the company.
I am sure that this is common knowledge to most here that post, but I thought that this was going a little off course as to the original question that was asked.
NWInsurance
I would also mention that not all buy sell can be deducted by the company. This would depend on if it was an entity buy sell or not.
The question was really asking which type of Insurance would be best to fund this agreement, and if life insurance is even a good choice.
There are other options but for a smaller company who does not have huge cash reserves life insurance is in many times the best engine. If you are using a entity to purchase the insurance then it does not matter, but if each owner is purchasing on each other, then as mentioned above one of the people could get shafted as they have to pay more for the insurance if their partner is older.
I would also mention that before you even start on this process you should do your homework as there are many options and you would need to see if a entity cross-purchase would be best.
Once you discover that then the type of policy can be perm or term. We have done some VUL (BAD RAP BECAUSE PEOPLE SELL IT WRONG) but I would only do that if you max fund on a option 2.
Term may be a good product, but if the owners are older it may be extremely costly.
I defiantly think that before you work to hard on this one you need to at least get the basics. I am sure that your broker has some info that you can look over.
For instance if there are 3 owners on a entity plan there would be 3 policies. Each on a owner, each owned by the company. On a cross-purchase there would be 6 policies. Each owner would purchase a policy on the other 2 owners.
As was maintained this is all to allow those owners to continue the business without taking on a new owner (the old owners family)
This plan is formulated by the owners/partners etc. with a set value for their share of the business. These plans can be great for agents as they can provide a constant stream of applications as the business grows.
For instance in a cross purchase lets say that the business is worth 900k with 3 owners. Each owner would purchase 150K on the other 2. If one dies each owner would then pay 150K to the deceased family giving them 300k.
As the business grows this plan changes, and if you are a good agent and keep up with the client you will find that they will need to continually update this with more insurance as the company grows. No churning needed as this is just how this way of funding a insurance plan works.
If perm insurance is chosen, then there are ways to allow the owner to take the insurance with him once he retires, while the company was able to pay for the insurance while he was in the company.
I am sure that this is common knowledge to most here that post, but I thought that this was going a little off course as to the original question that was asked.
NWInsurance
- 2,152
Yea, it got a little off of track but, oh well!
Okay, this let us make this simple. Business worth 1M, two Owners, so some say that both owners take up two policies in the so called Buy/Sell agreement. So for the price of a Term Policy the surviving owner will recieve 500 grand asset from the other Owner surviving family? This simply doesn't cut it with me or my family at all! In fact, these plans really don't sell that well because most see it for what it is, simply a way of selling policies.
To break it down, on the table we have 2 Million of Assets, a business worth a Million and two policies worth 500 grand each. As one Owner passes away, thier family recieves the total of 500 grand not 1 Million? Basically they only recieve 25% of what is on the table, now this is what we call being Shafted! Once explain to the Owners and their familiies most will not agree that being shafted is a good way of doing business.
While I'm all for Insurance for Continuation Planning, but in all reality the Buy/Sell agreement is nothing more then a part of Continuation Planning. Just depends upon how one plans for Continuation of the business. I suggest this, which I find more thoughtfull for all concern. Each Owner/Partner takes out a policy on themselves, making their beneficiary the beneficiary (novel idea?), the proceeds will more then cover continuation (as in credit and hiring talent) while the other owners can buy out with their own money! So this way the family of the dead Owner/Partner recieves 100% of Assets of their dearly parted.
The Buy/Sell Agreement, as suggested by some here comes from Brochures of Insurance Companies. While simple and one can argue, easy to sell it simply doesn't make sense at all.
Okay, this let us make this simple. Business worth 1M, two Owners, so some say that both owners take up two policies in the so called Buy/Sell agreement. So for the price of a Term Policy the surviving owner will recieve 500 grand asset from the other Owner surviving family? This simply doesn't cut it with me or my family at all! In fact, these plans really don't sell that well because most see it for what it is, simply a way of selling policies.
To break it down, on the table we have 2 Million of Assets, a business worth a Million and two policies worth 500 grand each. As one Owner passes away, thier family recieves the total of 500 grand not 1 Million? Basically they only recieve 25% of what is on the table, now this is what we call being Shafted! Once explain to the Owners and their familiies most will not agree that being shafted is a good way of doing business.
While I'm all for Insurance for Continuation Planning, but in all reality the Buy/Sell agreement is nothing more then a part of Continuation Planning. Just depends upon how one plans for Continuation of the business. I suggest this, which I find more thoughtfull for all concern. Each Owner/Partner takes out a policy on themselves, making their beneficiary the beneficiary (novel idea?), the proceeds will more then cover continuation (as in credit and hiring talent) while the other owners can buy out with their own money! So this way the family of the dead Owner/Partner recieves 100% of Assets of their dearly parted.
The Buy/Sell Agreement, as suggested by some here comes from Brochures of Insurance Companies. While simple and one can argue, easy to sell it simply doesn't make sense at all.
NWInsurance
Expert
- 85
Hum easy fix....
Again this is not the only way, but again works if the partners can not afford to buy eachother out.
The partners, or co owners would agree as part of the buy sell what the worth of the business way. In your example they would not buy 500K they would buy enough to make the family whole, and buy their share. In your example that would be 1.5 million, not 500k.
Again this is one of the ways in creating such a plan. One could buy a plan on themself, but there is not legal way to inforce that. (to make them pay the policy)
It the partners had enough cash, they could buy eachother out, but that is usually not the case.
When done properly, a Buy-Sell funded by life insurnace can be the cheapest and most convienent way to fund a buy sell.
No offence, but your example did noting to prove your point as you were funding a buy sell that should be at 1.5 million per man on the other at 500k.
That would not make sense and would not do what a buy sell is meant for. Now lets use that example again, but funded properly.
Each partner purchaces 1.5 million on the other. 1 dies, and then the surviving partner uses the life insurance to buy his share of the company,and pays the family what the company was worth.
I am not sure of many people who A: Have 1.5 million sitting around for that reason, and B: if you did the interest earnings would be much greater than the premium of the term policy.
Again this is just one way to fund a buy sell, but just saying that they should buy their own policy, or pay the family off with their own funds is a little silly.
Lets say they just bought their own policies, then partner 2 stops paying on his, and then dies.
His family does not get payment from the life policy, and partner 2 now takes on a new partner (the deceased families) because he can pay them off, or the business is disolved.
Maybe you just used a bad example, but I do not see your logic.
I used the phrase partner to simplify things.
Again this is not the only way, but again works if the partners can not afford to buy eachother out.
The partners, or co owners would agree as part of the buy sell what the worth of the business way. In your example they would not buy 500K they would buy enough to make the family whole, and buy their share. In your example that would be 1.5 million, not 500k.
Again this is one of the ways in creating such a plan. One could buy a plan on themself, but there is not legal way to inforce that. (to make them pay the policy)
It the partners had enough cash, they could buy eachother out, but that is usually not the case.
When done properly, a Buy-Sell funded by life insurnace can be the cheapest and most convienent way to fund a buy sell.
No offence, but your example did noting to prove your point as you were funding a buy sell that should be at 1.5 million per man on the other at 500k.
That would not make sense and would not do what a buy sell is meant for. Now lets use that example again, but funded properly.
Each partner purchaces 1.5 million on the other. 1 dies, and then the surviving partner uses the life insurance to buy his share of the company,and pays the family what the company was worth.
I am not sure of many people who A: Have 1.5 million sitting around for that reason, and B: if you did the interest earnings would be much greater than the premium of the term policy.
Again this is just one way to fund a buy sell, but just saying that they should buy their own policy, or pay the family off with their own funds is a little silly.
Lets say they just bought their own policies, then partner 2 stops paying on his, and then dies.
His family does not get payment from the life policy, and partner 2 now takes on a new partner (the deceased families) because he can pay them off, or the business is disolved.
Maybe you just used a bad example, but I do not see your logic.
I used the phrase partner to simplify things.
- 17,077
How are they screwed?
They get $2,000,000 for their half of a business that they have no interest in working at.
In our case...they would have been worse than dead weight. It was a motorcycle dealership and the wife didn't know a sprocket from a piston and didn't want to. She also had no head for business and would be the first to admit it.
The kids were in grade school and were both pampered girls who would likely never have an interest in business or motorcycles either.
That situation is the whole reason many (if not most) key man policies are purchased in small businesses. No one is screwed. Without the policy in place, the family of the deceased is forced to go to work in a business they may not have any knowledge or interest in. Or they have to find a buyer for their half.
The policy allows them to be bought out instantly upon the death of their spouse at a fair price (as pre-determined by their spouse) and the surviving partner is now the sole owner of his business and doesn't have to worry about dealing with partners who may not contribute to the business or agree with how he wants to run it.
It's win/win.
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