Advanced Underwriting Consultants

Question of the Day – August 11

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: I am working with two owners of a closely held business on their buy-sell planning.  What kind of buyout triggers should I be encouraging them to consider?

Answer: Life insurance professionals often concentrate on helping business owners plan for the death of one or more of the business owners.  That’s understandable, because life insurance helps provide the funding needed to make a transfer at death go smoothly.

Business owners may be naturally interested in making plans to transfer their ownership in the business upon other events.  For example, if one of the owners is older than the others, planning for a buyout at retirement may be important.  In other businesses, planning for a buyout in the event of the permanent disability of an owner might be vital.

What are some of the other buyout triggers that should be considered?

  • Divorce of an owner
  • Personal bankruptcy of an owner
  • Criminal activity of an owner
  • Failure of an owner to do his job
  • Inability of the owners to get along

The life professional should work with the business owners and their other advisors—attorney and accountant—to plan for multiple buyout contingencies.  The disability contingency may lead to another insurance sale.

The other lifetime buyout contingencies may not lead to a direct insurance sale, as they are normally funded through some kind of an installment buyout.  However, if the cash value of a permanent life insurance policy is available to use as a down payment for a lifetime buyout, the parties may be glad they bought permanent instead of term insurance.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.