How to Fund Your Buyout Agreement

Last week I covered buy/sell agreements and if you missed it you should definitely check it out.

One of the most common ways to fund a buyout agreement, also known as a buy/sell agreement, is with a combination of life insurance and disability insurance policies. The potential problem is how to fund the policy premiums when the business is worth many millions of dollars, and the business owners are older?

In some cases, the policy premiums can be in the six- to seven-figure range, and paying the policy premiums can the tie up precious cash resources. So what can you do? You absolutely need to fully fund the buy/sell agreement.

At some point, it makes sense to use bank financing instead of cash as a way to pay the premiums of the life insurance policies. In a similar way bank financing is used to purchase a building, or equipment, or vehicles, you can also use bank financing to purchase a life insurance policy.

Financing the life insurance premiums to fund a buy/sell agreement can benefit all of the parties involved. The benefit for the owners of the business is it frees up precious cash resources that can be used for other things to grow and run the business. The benefit for the bank is a business loan that has three forms of liquid collateral: the cash in the policy, the policy death benefit, and a letter of credit. The benefit for the insurance company is a very large life insurance policy that is over funded.

The technique is known as life insurance premium financing and it’s been around for over 20 years. It can also be used by high net worth individuals for estate planning purposes. Most recently, employers are using life insurance premium financing to create pension plans for key employee retention programs. This is especially valuable to healthcare organizations who are all struggling with the physician shortage.

I’ll talk more on this topic next week on The Alemian File. In the meantime, if you have questions or would like more information about life insurance premium financing, send an email to David@theAlemianfile.com, visit my website CapitalCrestFinancialGroup.com.

Absolutely, make sure you come back here next week for another edition of The Alemian File.