Funding a Buy Sell Agreement with Life Insurance

Speaker 1 (00:07):

Hi, I’m Bill Bosma, and today I’m here to talk about the numbers behind funding a buy-sell agreement. With life insurance, it’s not uncommon for people to push back against life insurance, after all, who really likes paying the premiums. However, I want to take some of the emotion out of it and really focus closely on the numbers. Let’s assume Bob and Sue are 50 50 owners of a 10 million company. The buy sell agreement says if one of them dies and there is no life insurance, the survivor or the company has to buy the decedent’s shares over 10 years. Of course, that 10 year buyout has an interest rate associated with it. Furthermore, the company has to net more than that in order to pay tax to cover the buyout. Additionally, this company, like all companies, works on a margin, so we have to factor it up by that margin to determine just how much sales is it gonna take to fund this buyout. 

Speaker 1 (01:13):

So we have to have a certain amount of sales in order to net enough to allow enough pre-tax dollars to pay taxes to net enough to be able to pay the I sell payments over a given number of years at a given interest rate. Have any idea what that will be? How about a hundred million dollars of sales? Your number could be more or less, but I’d urge you to calculate it and I bet you’d be a little surprised. Equally surprising is that at 40 years of age are reasonably healthy. Bob and Sue could have bought 5 million of 20 year term insurance for about 3,500 bucks a year. Did you hear that? $3,500 of annual premium versus dedicating a hundred million dollars of sales. Here’s something to chew on. What if their property casualty carrier offered them an insurance policy for $3,500 a year to guarantee not losing a hundred million dollars of sales that contributes $5 million of profit to the bottom line? It doesn’t matter if your buy sell is for a hundred thousand or a hundred million, the economic dynamics are the same. I beg you to approach this intelligently rather than emotionally. Thank you for your time today. Again, this is Bill Borsema of OC Consulting Group, and don’t hesitate to let me know what I can do to help.

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