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Pairing Life and Disability Insurance Solutions

To showcase our new life insurance branch, we want to highlight a recent case that combined the importance of life and disability insurance solutions for business owners.


Client Facts:


The clients are business owners of a collection of ophthalmology and optometry practices throughout two states, and they are practicing owners. They each own two separate entities, alongside other owners: 1) is a surgery center and 2) is an optometry practice.


The surgery center is valued at about $8MM and has four total owners (two are soon to transition out of the business). The optometry practice is valued at $10MM and has three total owners (one is soon to transition out of the business).



Client Goals:


The businesses were in the process of restructuring and updating their documents, as well as executing a new operating agreement and buy/sell agreement. In addition, they had just hired a new CEO that agreed to come out of retirement from a large hospital system to help with the structural transition. They plan for the current COO to learn from the new CEO and take over his role when he retires.



Client Problems:


Problem #1: The new buy-sell agreement is not funded properly.

Problem #2: The business had not had a valuation in several years.

Problem #3: Need a way to incentivize the young exec to stay with the company long-term.



Client Solutions:


Solution #1: Create and fund a buy-sell agreement.


The buy-sell is triggered in the event of:

  • Death

  • Disability

  • Divorce

  • Disillusionment


The owners wished to fund the buy-sell for the two practicing owners, knowing that the third and fourth owners would soon be bought out of the business. The two practicing owners would need life and disability insurance coverage that would be payable to fund the buy-out of the surviving or non-disabled partner.


Life Insurance Funding

  • Because they own two separate businesses, we determined that 2 policies were needed on the lives of the owners.

  • We examined a split dollar arrangement to only purchase one policy on each owner; however, the owners wished to keep it simple and opted for a policy for each business.

  • They determined that an entity purchase arrangement was best in this instance. One owner is part of the family legacy ownership, while the other owner is not. The legacy owner did not wish for the new owner to own 100% of the company in the event of his death. Thus, he determined an entity purchase arrangement was best to protect the family.

  • The partners are both young and healthy and were able to obtain term coverage through an accelerated underwriting program. All policies are owned by the business, paid for by the business, but not deductible to the business due to the buy/sell nature.


Disability Insurance Funding

  • The owners determined to only fund the surgery company as they are practicing surgeons and at a higher risk of being unable to operate due to disability.

  • We obtained maximum disability coverage on each. The maximum coverage does not cover the full buy-out and specialty coverage would be needed if they wished to get the full amount.

  • The owners were comfortable with the level of coverage obtained from traditional carriers and opted not to purchase supplemental coverage.


Solution #2: Facilitate an informal business valuation.


The owners did not wish to do a formal valuation, so we facilitated an informal valuation to determine an agreed upon value of the business. During this process, we facilitated several meetings with the executive team, owners, attorneys, and financial advisors to get everyone on the same page.


Solution #3: Key person retention through a “golden handcuffs” 162 bonus plan.


Once the buy-sell was funded, the owners wanted to implement a “golden handcuff” arrangement for the key executive they wished to be the future CEO.


So, we implemented a 162 bonus plan that would ultimately vest after ten years and be transferred to the key executive. For the first ten years, the company would own and fund the policy on behalf the insured/exec.


We used a traditional permanent IUL product. The policy would act as a key person policy during the vesting years, as well as be maintained as an asset on the business balance sheet.


Once the vesting requirement is met, the company will transfer the ownership of the policy to the employee as a bonus. This transfer is a taxable event for the employee and a deduction for the company.


(A note on taxation: The employee will be liable to pay taxes on the economic value of the policy annually. This is made fully transparent to the employee before implementation. The taxes are minimal but need to be accounted for. We help the advisor team lay out a plan for how the executive will pay the tax bill upon vesting. It can be a large tax bill, so we help the business owners and executive understand what will happen and what are the options to help alleviate the tax burden for the employee.)


Business owners have a lot to juggle, and there’s a lot that can go wrong. We can help you help your business owner clients with life and disability insurance solutions for almost any potential scenario. Do your clients a favor and get them prepared for life’s surprises.



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