Last week I wrote about Key Person insurance and how it can protect the business via insuring the sole proprietor or “Key People” (decision makers). With so many businesses being started in 2021 (or restarted), utilizing such a strategy can and should be a part of any business continuity plan. You can access that article here.
But what about those businesses which are structured as partnerships? Since more than one individual brings talent, experience and capital to the company, should there not be a mechanism in place for the business to carry on in the event of the death of one of the partners? After all, each person will usually bring their own unique skill set to the company, be it financial acumen, marketing or product development. Losing one (or more) of these talents risks the future of the company. And, of course there are the same issues which must be considered as in a Key Person situation. The deceased partner’s family will undoubtedly need financial support, either in lump sum or in installments. Further, employees need the reassurance of knowing the company will remain viable after the loss of one of its partners. Without a Cross Purchase Agreement in place, all of these factors become risks that could jeopardize the company as a going concern.
Enter the Cross Purchase Buy/Sell Agreement. Under such a plan, each partner individually agrees to purchase a part of a deceased partner’s interest in the event of death. This is usually accomplished with each partner purchasing a life insurance policy on each of the other partners and listing him or herself as beneficiary. If an owner should die, the remaining owners use the life insurance proceeds to purchase the deceased owner’s share of the business. In this way, the business can be carried on in the same fashion as it had been, uninterrupted. Additionally, there could be advantageous tax consequences for the acquiring partners however, any discussion of such should be made with a tax professional beforehand.
The question then becomes which type of life insurance should be used to fund this strategy. Typically, there are two types of insurance that are considered with a Cross Purchase Plan; term and permanent. Term insurance is the cheapest and is widely used however, with term insurance there is no cash value component. Additionally, term insurance can expire, depending on the term of coverage selected. Permanent insurance, such as Whole Life or Universal Life can also be used in a Cross Purchase Plan. Whole Life typically pays a guaranteed rate of interest (and perhaps a dividend, which is not guaranteed) which builds cash value. Universal Life also builds cash value, based on the excess of premium payments over the cost of insurance. The cash values in both Whole Life and Universal Life can be accessed by the owner of the policy, either via withdrawals or loans. While there are many benefits to accessing and using the cash value in a permanent life policy, it should be noted that the death benefit is reduced via withdrawals or loans. This could have an impact on the resulting death benefit should it be needed to fulfill the Cross Purchase Agreement.
Per my Key Person article, I realize this isn’t a subject that most partnerships want to dwell too much on. However, taking the time to plan for what could turn out to be the inevitable will avoid much heartache later and also give peace of mind during your day to day activities today.
If you’d like to talk about how Cross Purchase insurance can give you, your family and your employees peace of mind, please contact me at d.babecki@db3insuranceservices.com or give me a call at 941-704-3134. As always, thank you for reading and let me know if I can be of service.
About David J Babecki
David Babecki is the Owner/Founder of DB3 Insurance Services and has over 20 years of experience in personal insurance, proudly protecting clients against outliving their money, stock market risk, and of course, insuring their lives against the unforeseen.
David started his career with Raymond James & Associates in 2000 before becoming an independent agent where he offers a number of services to solve client needs. David has spent the majority of his life in the beautiful Tampa Bay area where he currently resides with his family.
David is a Licensed Life Insurance Agent FL # D053146
The above article reflects the opinions and thoughts of David J. Babecki. The information contained in this material is believed to be reliable, but not guaranteed. It is for informational purposes only and is not a solicitation to buy or sell any products which may be mentioned. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation.
Please note: all guarantees and/or promises are based on the claims-paying ability of the respective insurance company.
