How do you fund a buy-sell agreement with life insurance?

I like Cross Purchase for small groups of owners because each person exercising the agreement (after an owner's death) receives a step up in cost basis for the stock they purchase through the agreement.

I also look at the estimated growth of the organization over nex 3-5 years and fund the growth. Initially we have excess coverage but as the company grows client does not need to buy insurance on a yearly basis. This method has come to be useful for a number of clients. Also remember Key Person coverage. Life and Critical Illness coverage should be considered. We have a number of clients with a 3 million critical illness policy which is the maximum we can get in Canada from a few key insurance companies.

Consider leveraging a hybrid approach for buy-sell agreements using life insurance. Blend cross-purchase and entity-purchase methods to optimize tax efficiency and simplify administration. For instance, owners can initially use cross-purchase agreements, then transition to entity-purchase as the business scales. Regularly review the agreement to align with business valuation changes and evolving tax laws.

I think we're ignoring the most important thing here 'what does the shareholders agreement say must happen in the trigger event?' This will dictate the appropriate ownership structure for insurance. Certainly in Australia, more often than not the cover is personally owned. With the outcomes governed by the documentation of the 'Buy/Sell Agreement'.

Beautifully and elegantly summed up Paul Milbourne. Easily one of the country’s foremost Life Protection Specialists. All I’ll add is this: Human beings need time to grieve and recover. At a time of despair and need, Life insurance gives people the choice to do so without the worry of where the money to continue living their life will come from.

What life insurance does in these circumstances is move the business, staff, families, clients, suppliers, creditors etc from a state of uncertainty to one of certainty. Life insurance is the only tool I know that will be there when it is needed most.

Life insurance is the only instrument that can produce immediate cashflow at the time of death or critical illness. It allows grieving families to exit the business at a fair value of their entitled share which maintains business efficiency. It also gives companies breathing space of 1-2 years to consolidate and rebuild confidence in their stakeholders with the injection of cash equivalent to their annual turnover.

From my experience, adding life insurance to a buy-sell agreement is highly effective. It is like having a financial superhero on standby. By providing quick cash if an owner passes away, keeps things running smoothly and saves the day when you need it most. This clear, agreed-upon value helps prevent disputes. Adding critical illness insurance further protects the business. Policies with Return of Premium (ROP) options, if properly structured, can allow owners to recover premiums if they don't make a claim, minimizing tax burdens. If an owner faces a critical illness, the policy pays out to the corporation, ensuring financial stability and smooth business operations.

Working with an advisor who is an independent agent allows you to obtain best underwriting outcomes and therefore best pricing on the policies funding the agreement. Also, when the owners are applying for buy-sell coverage, they should consider if the business also needs key person coverage on the owners.

I still feel it is the cheapest form of funding. The alternative is a sinking fund of some sort and will still likely be 100% funding rather than the alternative of life insurance.

Directly addressing the need for buy-sell funding can be a daunting task for many entrepreneurs. Thankfully, there are several life insurers out there that can remove the complexity from this process. By partnering with carriers who offer complimentary business valuations, not only can we determine the exact amount of coverage needed, but the financial underwriting becomes much easier. Working with the right carrier can make all the difference.

Consider establishing a sinking fund alongside life insurance for buy-sell agreements. This can buffer against premium hikes and medical underwriting hurdles. Additionally, utilize a staggered policy approach, starting with term insurance for younger owners, transitioning to permanent insurance later. Regular policy audits ensure alignment with business growth and ownership changes. This multi-pronged strategy can mitigate the complexities and financial strain often associated with life insurance in buy-sell agreements.

Cross-insuring multiple business owners can be a challenge as multiple policies will be involved and the involved parties may just back out. Proving the company's sources of funds can be another challenge in this current age of anti-money laundering. However, these deterrents should not detract business owners from their main objective, which is to protect the integrity of the company and its ability to continue generating revenue even if any owner(s) are taken out of the picture

Constant reviews are so important that it should be repeated like a broken recorder. The value of life insurance policies only reflect situation of the company at that point in time. Businesses change so quickly and it is common that upon the next review, the company has outgrown its current risk mitigation strategies. Business owners are also preoccupied with their company and rarely have headspace to continuously remember and process the significance of their life insurance policies. It is the onus of the financial advisor to reiterate what these policies serve to do during every review.

Cash value life insurance uniquely benefits retirement savings even if not needed for buy-sell purposes. A major advantage is accessing cash value. This provides supplemental, tax-advantaged retirement income. I can structure the policy to provide a safe retirement income. Any remaining cash value at death passes to the beneficiaries as a legacy gift. The living benefits, especially withdrawals, are hugely valuable in retirement if the life insurance policy is not used for buy-sell funding. Most life policies won't be needed to fund a buy-sell with a death benefit, so planning for a lifetime benefit makes sense.