Business owners with the desire to see their businesses continue after they are no longer involved need to plan quite carefully. When an owner (or owners as it may be) is planning for succession in a retirement or buyout scenario there are many things to consider.
When the succession planning being addressed involves the death of the owner, the topic of life insurance comes to the forefront.
With business succession planning, as in other estate planning1 situations, life insurance can provide an immediate lump sum of money. That sum, the death benefit, can be used by the beneficiary to buy out the deceased owner’s share of the business.
One of the most common business succession planning strategies is the “buy-sell agreement”. A buy-sell agreement is when one party (or parties as it may be) agrees to buy the deceased owner’s share of the business at a predetermined price from the deceased owner’s estate or heirs. Having such an agreement in place can help to ensure the smooth transition of ownership while also minimizing the potential disruption of day-to-day operations; operations that may already be impacted because of the deceased owner’s absence.
The life insurance policy can provide the funding necessary to buy out the deceased owner’s share of the business. A business’s continuation can be jeopardized when there is no agreement and/or insurance policy in place. Without these two components the remaining owner(s) could be forced to liquidate if the heirs are not interested in keeping the business, forcing the remaining owner(s) to try and raise the capital needed to buy out the heirs. Failure to do so could mean the end of the business.
One of the main types of life insurance used to fund a buy-sell agreement is Whole Life Insurance. It can be kept in-force for the life of the insured so long as the required premiums are paid. Whole life insurance offers guarantees regarding the premiums, the cash value and the death benefit. 2 Most whole life policies guarantee a level premium at the outset. Assuming the premiums are paid in full and on time, the cash value of a whole life policy will grow at a guaranteed pace as stated in the contract.3 The death benefit is also guaranteed so long as premiums are paid as scheduled.
And some whole life policies also pay dividends4 (when issued by a mutual insurance company) and are considered participating policies. When the insurance company pays dividends to its whole life policies, the cash value and the death benefit both have the potential to increase. Consult with your insurance professional to go over what may be right for you.
1 Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
2 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.
3 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.
4 Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors.
Source: 2020-110544 EXP 10/22
Pacific Advisors Orange County
2855 Michelle Dr., Suite 320
Irvine, CA. 92606
CA Insurance License #0I69087, Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 333 N Indian Hill Blvd., Claremont, CA 91711 PH: 909-399-1100. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is a wholly-owned subsidiary of Guardian. Pacific Advisors LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through One Pacific Financial & Insurance Solutions LLC, DBA of Pacific Advisors LLC. Pacific Advisors LLC is not a registered investment advisor.