Business uses for life insurance tend to be the elephant in room that no one wants to talk about. He’s there. He’s real and huge, and he has the ability to stomp the life out of a company, but Executives and Boards of Directors often skirt the issue of life insurance unless it is required to do business. We have an accountant that has been trying to get the two partners of a $14 million business, clients of his, to consider the possibility that someone could have a very large mess on their hands if one of them dies prematurely. These partners are 37 and 41 years old and were given the business by their father, with the stipulation that it stays in the family. The father doesn’t want ownership going to a widow, leaving the surviving brother with a partner that may not want to own part of the business and could put the survivor in the position of coming up with $7 million to buy her out, or allowing her to sell her share of the business to the highest bidder.
The accountant has pointed out the life insurance elephant in the room for these two partners and, because they had talked to a New York Life agent and a Northwestern Mutual agent, had shied away from doing anything because they were presented with the option of buying whole life policies on each other for the amount of their share, $7 million. In theory they saw the prudence in coaxing that elephant out of the room, but when they were shown how much whole life policies would cost they decided the elephant was a nuisance, but for now one they could live or die with. I should mention that the business is worth $14 million, not because it makes a huge amount of money every year but because it’s a ranch in one of the most beautiful places in Colorado and the land makes up most of the worth of the business. So, there isn’t a lot of cash to fall back on and because the income is large, but not huge, carrying a loan for $7 million would sink the surviving partners boat.
When the accountant brought this to our attention he qualified the situations with the disclaimer that the partners weren’t real crazy about putting together a buy/sell agreement funded with life insurance because of their experience with the whole life guys. We sent quotes through our accountant showing that the elephant could be removed for a very small fraction of what they had been shown before, 30 year terms that would take them to the point where they would be doing what their Dad had done, handing ownership down to heirs keeping in line with the Dad’s wishes.
This happens far too often. Life insurance can save a business from liquidation if a partner, the CEO or a key person dies but it is often shoved to the side because companies look for help in all the wrong places. There is an assumption out there that household names are the best place to put your life insurance trust, but for the most part those companies didn’t become household names because of their expertise in business life insurance, and for sure not their expertise in impaired risk life insurance. Companies should seek out agents and agencies that have a common interest in solving the problem with the least out of pocket expense, if for no other reason than the fact that the life insurance premiums they use for business purposes is not deductible as an expense. In our agency we understand that we can deduct a lot of expenses, but we also get that you have to spend the money to get the deduction. And with life insurance if you deduct the premium it takes the death benefit out of the tax free status that it is known for.
So, if you would like to look into life insurance solutions for your business, whether buy/sell or key man arrangements or simply loan collateral required by a bank, call or email us. We can help and we promise that we care about your bottom line more than ours.
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