Your company is thriving and you’re kicking butt and taking names after you and your partner or partners put in years of hard work. Suddenly, someone tells you a story of a mutual associate who had a business partner that passed away and now that individual has to work with the deceased partner’s spouse.
The worst part is that the deceased partner had not finished finalizing a divorce because their spouse was a nightmare and now that same spouse with “0” experience and delusional thoughts becomes a partner. Sounds like a nightmare right?
Well, I’d say I wouldn’t want to be in that position and you shouldn’t either. The good news is that there is a way to avoid all this by doing a little planning and due diligence. But how exactly can you accomplish this, is what we will be discussing today?
Setting an Agreement and Picking a Funding Plan
When a business partner dies in your venture their company equity transfers over to their heirs with them getting same privileges. Now, as promised you can avoid this trap or dilemma by first creating some kind of legal agreement that you’ll later fund with a life insurance policy. This agreement is called a buy-sell agreement and you can set it up with your business lawyer or do it yourself with a service like LegalZoom. There are two ways to fund your cross-sell agreement and they are cross-purchase or entity redemption plan.
Cross-Purchase
The most popular way of funding a buy-sell which entails that each partner purchases life insurance on each other and names themselves the beneficiary. The policy your beneficiary on is also the one you’re responsible for paying and managing since it is in your best interest. This ensures teh the policy will not lapse due to lack of payment. If something was to happen to one of the partners the life insurance proceeds are used to buy up that partners equity from their family. This can get interesting when there is more than one partner since there will be a lot of policies needed to go into place.
Entity-Redepmtion Plan
An approach used by corporations and partnerships with more entities works by having the business buy up life insurance policies on each partner. In the event, the partner dies the life insurance proceeds will be used to buy up ownership from heirs. It is similar to cross-purchase except the company is the one buying life insurance. This may also have an additional benefit of being a tax deduction but we’re life insurance agents here and not CPA’s, so make sure to check with your accountant.
Securing a Life Insurance Policy
Once you figure out the best way to set up your buy-sell agreement it is now time to secure some life insurance policies. In this case, we will review the type of policy, amount of coverage and how to shop for life insurance policy. Let’s begin!
Types of Life Insurance
When looking for life insurance you’ll run into a lot of debates about what’s the best policy to buy but it really comes down to what you need. There is really two type of life insurance which are a term and permanent life, everything else is a variation of these types. (Learn More Here)
Term Life Insurance
A term policy is the most popular option with the ability to get very affordable premiums and can be purchased for a temporary need ranging from a period of 5 to 30-year terms. If you need life insurance for a longer period than that and would like to also have some tax-deferred investment growth than a permanent plan might be right for you.
Permanent Life Insurance
A permanent plan is designed to provide coverage until age 100 or 121 with cash value account that takes a portion of your premiums and stores them for interest return. You can access the cash value via loans if you need the cash. Please keep in mind that we don’t like to sell these plans as means to get rich but if you have the money to overfund these policies they may work in your favor but they do cost a lot more than a term policy. Simply put if you don’t see being in the same partnership or business for more than 30 years stick to term otherwise buy a permanent plan.
You can also agree with your partners that in the event the partnership gets resolved each of you can take the permanent plan for yourselves as a bonus. This can be a great way to supplement your retirement income or use as a way to transfer wealth to your heirs. It is probably the most logical option since the rates are determined by your age and health with chances of you getting any better deals being very slim.
Amount of Coverage
You should do a business valuation to see how much the business is worth and then times it by your partner’s equity percentage which will bring you to the amount you need to purchase on his or her life. I would personally double up on the coverage for two reasons. One you’ll need money to replace the work that your partner does and it will also take some time to adjust. The other reason is that your company may grow in revenue which increases its valuations and your thinking ahead.
You should also revisit the topic of life insurance as time progresses to ensure that you have an adequate amount of cover in force. For companies that like to be accurate with the coverage amount, an appraiser may be invited to get an exact amount of company value. Although, this is not that common it does happen.
Buying a policy
When shopping for life insurance the absolute best thing you can do is work with an independent agent or agency that shops with many different companies. The reasons are simple, for one no one life insurance company looks at you the same and you’ll ensure that you’re getting the best deal. It is quite common to pay double for the same type of coverage with the same caliber company so be sure to do your shopping. It has also been in our experience that business owners tend to take more risks and have certain hobbies like flying or mountain climbing which require an assistance of a very experienced insurance professional.
Work with InsureChance!
By now you should be an expert on buy-sell agreement life insurance but if you’re not it’s okay because that’s why we are here. Here at InsureChance, we work with over 60 top rated life insurance companies like Metlife, Prudential, Banner Life, Mutual of Omaha and many more. We put the power of shopping in your hands by letting you compare rates with all the top carriers. In addition to that, we are experts in business life insurance needs and can help you with the entire process of guiding you in the right direction and completing your entire life insurance application process. Also, if you have had trouble getting insured by other life insurers in the past we specialize in high-risk cases and can help you out. If you’re ready to set up your life insurance policy simply request an application on one of our quoters or call us at 888.492.1967. Welcome to InsureChance!
