Case Study: Using Permanent Life Insurance to Fund a Succession Plan/Buy-Out.

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1 Using Permanent Life Insurance to Fund a Succession Plan/Buy-Out

2 Table of Contents page 3 page 4 page 5 page 6 page 7 Introduction The Dilemma A Solution Real Life Example Learn More About the Authors Greg Hudgens, RHU, is a Senior Financial Services Sales Representative at The Cason Group. He joined The Cason Group in He works with agents selling individual life and annuity products in South Carolina, as well as Wilmington, North Carolina, and Savannah and Augusta, Georgia. A graduate of the University of South Carolina, he currently lives in Columbia, S.C., with his wife Lauren and their three kids, Reese, Ward, and Gibson. Vince Guerra, CLU, RHU, REBC, is currently the Manager of Marketing and Sales Development at The Cason Group. Previously he worked as a Sales Representative at The Cason Group, and also has an extensive corporate marketing background. He graduated from Liberty University in Virginia, and also holds an MBA from Robert Morris University. He lives in Greenville, S.C., with his wife Hope and their four kids, Selah, Lake, Jordan, and Gabriella. 2

3 Introduction Business owners can be ideal clients for most insurance and financial services professionals. Typically, they have more assets than your average individual, which means more opportunity for you to provide your products and services (and they can write bigger checks). We are currently entering a time in history that is unprecedented. The baby boomers are nearing retirement, or have retired, and many of them own businesses. If you ask the average business owner what their retirement plan is, they will often say it to sell their business. One problem with planning to sell their business, though, is they have not set up an exit strategy. In addition there can be multiple business owners who will retire at different ages. They spend a great deal of time working on their business and caring for their employees, but don t take the time to plan for their own future. 3

4 The Dilemma Asituation that can pose problems is having a company with multiple business owners in which a founder or majority partner is planning to retire. No one can force this person out since he or she is the majority shareholder. Buying him or her out could also deplete the business of its cash reserves, or require it to secure more debt than anyone wants. If the majority partner agrees to a buyout that includes a long payment period, then he or she may reluctantly decrease his or her standard of living. Obviously, this is not ideal. Other issues: Typically, when a majority owner nears retirement, there is a tendency to divide his or her job duties. This can create tension with other business partners who wonder how long the senior partner will hang around collecting a paycheck. If the senior partner doesn t want to retire, he or she doesn t have to if he or she holds the majority of the shares in the business. Conversely, the senior partner doesn t want to delegate away responsibilities and feel like he or she is not contributing to the success of the firm. Even worse, the senior partner might start to sense that others are wondering how long he or she will just be there trying to draw a paycheck. How can a company with multiple partners or shareholders buy out a majority owner at a price that is fair to the exiting partner, as well as the remaining partners, while protecting the firm s liquidity during the transaction and providing a firm jumping-off point so no one feels the majority owner is hanging around to collect a paycheck? 4

5 A Solution O ne solution is to use limited-pay whole life insurance as a financial vehicle to facilitate a succession plan. The business is the policy owner and beneficiary. The partner/owner who is retiring from the business is the insured. The guaranteed level premiums are paid by the business and provide a death benefit should the exiting partner die. So if the senior partner dies, the premiums are returned in the form of a death benefit, both tax free and in an amount larger than the premium that was paid. Plus, the policy builds cash value, which accumulates through the premium payment schedule. Once the policy is paid-up it will have accumulated enough cash for the business to make scheduled payments (usually over a 5-10 year period) to purchase some or all of the shares of the retiring business partner. 5

6 Real Life Example R ecently, an architecture firm reached a critical juncture in determining how to buy out its majority partner. He owned 75 percent of the architecture firm, which would create a financial strain on the remaining partners responsible for buying out the majority owner with cash from the business when he decided to retire. The majority owner wanted a lump-sum payout for his shares, but he didn t want to leave the firm under the financial strain of funding his buyout from the firm s assets or by the firm obtaining debt. The architecture firm worked with their local insurance professional who provided a solution using permanent life insurance Limited Pay Whole Life. The law firm obtained a $1.5 million 10 Pay Whole Life policy covering the majority partner. The firm paid $85,000 in annual premium for 10 years. At the end of the payment period the policy provided a paid-up death benefit of approximately $1.5 million. If the majority owner died an untimely death, the policy would act as a key-man policy to finance necessary changes within the firm, as well as return the premiums that had been paid by the younger partners. 6

7 The architecture firm also had the assurance that they could secure a tax-free withdrawal on the cash value of the policy and use the funds to facilitate the buyout of the majority partner. In addition, the 10 Pay Whole Life policy has provided a jumping-off point for the owners. When the majority owner is ready to leave the firm, the remaining owners can access the policy s cash value to fund the buyout. In this instance they would be able to pull $170,000 a year for 10 years. This would pay for $1.7 million of the majority owner s stock. Learn More If you would like to see a sample policy illustration and learn more, contact your Cason Group Sales Representative who can walk you through specific policy performance and application requirements. The Cason Group is committed to helping Life and Health insurance agents/brokers enhance their business by assisting them in meeting the needs of their clients. In addition, we help agents/brokers grow their client base through product specific and conceptual sales ideas. We are proactive in helping agents and brokers service their clients while bringing them useful sales ideas. The Cason Group (800) Follow us on LinkedIn 7

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