Key Man for a small business

[NWInsurance]

Depends on the size of the business etc. For larger cases I work along with their Lawyer, Accountant etc.

That is why I had mentioned earlier that you would need to increase the life insurance over time. It does benefit the agent because you are adding policies, but again if this is the right situation, (they do not have the cash, or do not want to collaterlize something, then life insurance can be a great way to go.

Some businessness will meet annually while others may not have that need. We try to be a partner, and you should never try to valuate a business yourself. That puts you in a very liable situation.

We are simply part of the solution. At the same time there are some occasoins where I will bring up the idea, and help formulate some of the plan. Being that I am not charging hours it saves the business owner the upfront costs of his CPA, and Lawyer to start the process, but in the end I rely on them to valuate the business, and determine the need for insurance.

There are other ways this can benefit the business as well. Lets say that you want to give the partners family their half (buy them out) at 1 million, but realise that once the other partner is gone you will have some expenses to hire new, and train. Now you can buy 1.25 million or whatever you see fit. Pay the family their share, 1 million, and use the rest to help keep the business a float during transition.

 

[James]

Okay, let us go back to the beginning. We are talking about Buy/Sell, which is a part of Continuation Planning, most businesses have a plan just not funded. We are not talking about personal insurance, I'm a strong believer that Business/Individual coverage should be kept seperated.

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.

First off, I have to insist this is about Business Continuation not Family protection! Don't muddy up the waters, quite nonsensical and honestly don't understand why you would lower your argument. Yet this is the main point you seem to miss.

First, such buy-sell planning doesn't add any asset value to Owner's family because he is exchanging the insurance benefits for his business value. In this case many want to use Term, meaning the return to the other owner or owners is dirt cheap! But the family sees no real value added or asset increase at all.

Secondly, these arrangements give the other Owner, Owners or Employees (this is really bad!) and expectation of ownership that should likely never be made unless death is expected, as in a hospice situation. A young owner, or at least the most I know have expectations that Wife, Children will grow into their position in time.

If you have business owners, with a working succesfull business the other owner or owners should have no problem finding capital to fund half of the business at the death of a partner. Trying to get Owner A to fund Owner B purchase of his half of the business is at best silly.

 

[somarco]

most businesses have a plan

That does not agree with most business surveys. Where did you get that?

An offshoot of this situation is disability buy out, something often overlooked and a greater likelihood.

 

[James]

That does not agree with most business surveys. Where did you get that?

An offshoot of this situation is disability buy out, something often overlooked and a greater likelihood.

Hummm, from my crystal ball!

Yes Disability is a far greater chance then death, obviouly a DBO policy should be in place along with personal DI.

Plus if there will be a financial problem in transferring the business to the surviving owner, both owners can leave instructions for their estate to finance the asset to the surviving owner. This way not only do survivors recieve all Insurance benefits but also will see an immediate income. This is not taking into consideration that for larger or Corporated (Stocks or Shares involved) business that may very well not allow insurance monies to pay off the business as in FAS 150 (there has been updated rules that relax some ruling on FAS150, I believe, not my expertise). The accounting procedure that states you can not use insurance money to buy back stocks, as they are a liability on the balance sheet. One should always make sure a comepetent tax professional involved in any such planning.

 

[slushhhpuppie]

So basically one family gets the short end of the deal?

This insurance in intended to benefit the business, not the family.... hence the name "Key Man".

 

[somarco]

Key man is for the benefit of the surviving business owner(s).

Buy sell insurance is for the benefit of both the business and the family. The business is provided with funds (via death proceeds) to buy out the partner's family. The family receives money in lieu of stock or partnership shares.

If the family wants to receive a share of future profits/revenues of the business, then they need to fund life insurance separately from, and in addition to the buy/sell insurance policy.

There is no reason why the surviving business owner would want to , or should be expected to provide this kind of coverage for the heirs of the deceased partner.

 

[James]

Key man is for the benefit of the surviving business owner(s).

Buy sell insurance is for the benefit of both the business and the family. The business is provided with funds (via death proceeds) to buy out the partner's family. The family receives money in lieu of stock or partnership shares.

If the family wants to receive a share of future profits/revenues of the business, then they need to fund life insurance separately from, and in addition to the buy/sell insurance policy.

There is no reason why the surviving business owner would want to , or should be expected to provide this kind of coverage for the heirs of the deceased partner.

Well, this is awfully short sighted, if I build a business I expect to recieve my share. If I die, I would expect the business proceeds of my work to go to my family. I would never agree that others, obtain my assets because they gambled on my life via a term policy or any for that matter. Of course these issues should be dealt with in the planning of succession and continuation of the business.

Under your explanation I would assume if you died that all shares or stocks you own in any company should come to an end and not passed to your heirs but to the heirs of the people still alive in the business? Of course this would be done via insurance, which some companies have done to one extreme to another, which only brought serious scutiny by the Securities and the FASB as in COLI, STOLI, BOLI and so on. Obviously these arrangements of using Insurance to replace Shares and Stocks (or funding Buy/Sell agreements) is quickly going out of favor by the accounting world.

Now, if you really want and a good talker, go to a company with over a thousand workers. Sell them the idea of "Large Numbers Don't Lie", likely they know this is true. Ask them how many of their employee's die every year, obviously some will. Well you issue a policy (cheap term on every employee as in Key Man) on every person employed. Don't laugh, there are companies found that had Billions of enforce coverage on their employees! Averaging something like 400 grand on every person including janitors. Yet though, the writing agent or agents were kept busy, as many employees had no idea that the company had policies on them. So the real meaning of the story, is don't stop at the owners or key people! Get'em all!

 

[somarco]

Stop diverting the topic away from key man, or buy sell, to SOLI.

 

[James]

Stop diverting the topic away from key man, or buy sell, to SOLI.

Make me! BOLI, STOLI & COLI, it all ryhmes!

 

[padthaiforlunch]

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

So on an entity plan the company can deduct the premiums?