Chapter 15. Buy sell insurance – cents for dollars.
This is relevant for family members with business interests and is best illustrated with an example. Ben, Dan and Michael (married to Eve) own a textile manufacturing business. Ben and Dan each own 25% and Michael owns 50%. The business is valued at $6,000,000.
| Ben |
25% |
$1,500,000.00 |
| Dan |
25% |
$1,500,000.00 |
| Michael |
50% |
$3,000,000.00 |
| |
|
$6,000,000.00 |
If Michael dies, Ben and Dan will have to come up with $3,000,000 to pay the Eve for Michael’s share of the business. If Ben and Dan cannot fund the purchase, the Eve may choose to work in the business until she can be paid out. This may, in worst case scenario, collapse the business. The smart solution is to apply for life insurance policies on the life of each owner which is paid to the estate of the deceased in return for the equity of the deceased owner. This solution will see the Eve receive $3,000,000 for the business share, and Ben and Dan are able to run the business uninterrupted with increased equity each. This is commonly referred to as a “Cents for Dollars” strategy because the cost of the insurance is far less than the benefits. The legal contract is called a “Buy Sell Agreement”.
|
