life insurance

Let Life Insurance Fund Your Buy-Sell Agreement

by Michael Goodman

The Problem

For many professionals and small business owners, especially those involved in partnerships, a Buy/Sell agreement may be needed. These agreements are used when one of the partners, or a Key Man, dies and the remaining partners or owners do not want the heirs to become owners or partners. So the remaining partners, using a formula in the agreement, buy out the heirs and the business goes on without the deceased owner. The big question is where to get the money to compete this transaction?

In many partnerships, the business is the largest asset of the partners and the buy-out value of a dead partner may be substantial. If they don’t have enough cash readily available, they may have to find another partner to replace the one that died, they may have to liquidate other income-producing assets, or they might have to borrow the money and take on debt. Is there a better way?

The Solution

Many partnerships and small businesses use life insurance and a third-party investor to put the funding in place before it’s needed. Life insurance policies are purchased on each of the partners and the premiums are paid by the investor, secured by the death benefit and the cash value.

Sometimes, additional business assets are needed to secure the loan for the premium but this is decided on a case-by-case basis. However, the partners do NOT have to provide personal guarantees. The business partners MAY have to make interest payments on the premiums, but that’s it, and the interest payments are often tax-deductible for the business.

By doing this, the partners have now secured money to buy out the heirs of any partner and will not have to use their own money. They don’t even have to pay the premiums, they just pay tax-deductible interest on the premiums. The insurance company sold a large policy, and the investor makes a highly-secured loan. Everybody wins!

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7 Things You May Not Know About Life Insurance and Annuities

7 Things You May Not Know About Life Insurance & Annuities

1. The death benefit in a life insurance policy pays out free of income taxes in most cases. (consult your tax advisor to make sure this is true for you)

2. The cash value in a whole life or universal life policy builds tax-deferred.

3. If set up and managed properly, an indexed universal life insurance policy (an IUL) can provide a retirement income free of income taxes using tax-free withdrawals and zero-cost, or low-cost, policy loans.

4. The cash value in a whole life or an indexed universal life policy (IUL) never goes down because of a bad stock market.

5. The hottest thing in the life insurance business in 2014 is “Living Benefits“; ways to use the death benefit in a life insurance policy WHILE YOU ARE STILL ALIVE!

6. Annuities offer a guaranteed income that you can never outlive.

7. The hottest thing in the annuity business in 2014 is still the Lifetime Income Benefit Riders, which offer higher incomes, protection from loss, and an income for life.

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