The United States has more than 28
million businesses. And the lifespan
of a family-owned business
is 24 years, which could mean a long-term
and mutually beneficial relationship for
Plus, 88 percent of family-business
owners believe their family will still be
controlling their business in five years,
according to the Family Business Institute.
But, sadly, the statistics tell a different
They show that only about 30 percent
of family businesses survive into the second
generation, 12 percent continue into
the third generation and only 3 percent
will make it to the fourth generation and
beyond. Research shows that family-business
failures can be traced back to one
factor-a lack of family-business succession
What does this mean to us as financial
advisors? It signifies a big opportunity
in the business-owner market; business
owners and their families represent a
large and ever-growing affluent market. It
is an identifiable market that needs what
we offer-good advice and life insurance
products that solve their biggest
succession-planning issues. And, this is
a market open to our message if we tell
our story with passion and enthusiasm.
During meetings with business owners,
it is important to share stories about great
women and men who poured their hearts
and lives into building their family businesses.
This is the "American dream"-to
build a great business for loved ones and
family to benefit from. But, we all have
heard horror stories of businesses that
have vanished almost overnight due to
the (preventable) devastation caused by
death, disability or family infighting.
There is no shortage of excuses; people
will say they are too busy, too young,
too challenged right now, or even "don't
worry, I will get around to it someday
when the time is right." These delays are
horribly regrettable when the inevitable
occurs. I do not want my clients to make
those mistakes. You need to convince
your clients that it is critical to their businesses
and families to plan now.
The result of not planning is family
pain. Our job, as financial advisors,
is to talk about that pain in such a way
that the business owner cannot ignore
these issues. Because once they realize
these are serious problems, they will take
action. So then, what issues do business
owners face? Business owners look at succession
and continuation challenges such
as: Who will take over my business in the
future? What will I be paid for my business
if I am alive? What will my family
get if I die while I am still working in my
business? And-why are life insurance
and disability products the right tools to
get the job done?
Life insurance and disability products
are ideal tools for family-business owners
to use because they serve multiple purposes
and effectively fund some essential
components of a succession plan. Here
are three of the ways you can utilize
life insurance when creating a plan for
1. Funding Buy-Sell
Buy-sell agreements spell out what
should happen when business owners die,
become disabled or retire. Provisions in
these agreements state who the stock of
the deceased is sold to and at what price.
Since many businesses lack liquidity,
life insurance and disability insurance
are good products to fund buy-sell agreements.
Without properly structured life
insurance and disability buy-sell policies, a buy-sell agreement by itself will
the job. It is like expecting a car to take
you to your destination without fuel.
We all know that permanent life insurance
is the best solution for funding a
buy-sell agreement. However, we also
know that most of the CPAs reviewing
our proposals tell the clients to buy term
life because it is cheaper than permanent.
One way to bypass this objection is to
propose buy-sell life insurance that not
only provides the death benefit that is
needed buy also will fund the retirement
part of the buy-sell agreement. This is a
buy-sell plan that also has supplemental
retirement plan benefits and can be done
using a three-step approach:
A. Set up a Section 162 bonus arrangement
between the company and
each business owner. This bonus
is tax-deductible to the business and
taxable income to the recipient.
B. Have the client's attorney write
the buy-sell agreement between
the owners. If it is a cross-purchase
agreement, each business owner
agrees to purchase the other owners'
shares at their death.
C. Have their attorney draft a private
agreement between the owners.
In addition to paying income tax on
the company bonus there is annual
tax on the value of the economic
benefit from the endorsement splitdollar
benefit. This tax is spelled out
in Table 2001 rates, which are contained
in Notice 2002-8.
Who are the best candidates for these
types of plans? Business owners who need
to accumulate assets for retirement and
also need assets to fund their buy-sell
agreement. Or they can be businesses
that already have a buy-sell agreement
that is unfunded or funded with term
2. Aiding Asset Accumulation
Outside of the Business
With a flat stock market for the last decade
and real estate in the doldrums, life insurance
can be viewed as a safe harbor asset
LIFE | Rich Niche – Great Need
class. By utilizing the tax advantages of life
insurance, such as tax-free inside build-up
of cash and tax-free access to cash values
when structured properly, life insurance
is a good vehicle to provide supplemental
3. Funding Key Executive
Protection and incentive plans are needed
to keep good employees working happily
and at the same time protect the business.
Life insurance can restore the financial
loss to the business resulting from the
death of a key executive.
Financial loss to the business from the
death of a key employee can be quantified
• Recruiting fees to find a
• Costs of training the replacement.
• Loss of profits during the
hiring and training of a new key
Golden handcuffs: This is a permanent
life insurance policy that provides
both death and living benefits. Should the
key executive leave the business before
the time specified in the agreement, the
key executive walks away with nothing,
leaving a valuable, cash-rich policy to the
business ownership group.
Golden parachutes: When the key
executive fulfills the terms of the agreement
they get the policy with the cash or
they get a supplemental income (deferred
compensation paid to them over the
number of years and for the amount specified
in the agreement.).
Additional opportunities for life insurance
to fill business owner needs:
• Collateral for loans from commercial
and private lenders. Lenders
are betting the owner will have profits
enough to pay them back. That will
work if the business owner doesn't die
prematurely. That is where life insurance
• Estate Planning-Allows for charitable
gifting replacement. Life Insurance
can also provide funds for low
cost Federal Estate Tax payments.
• ESOP Repurchase Liability-Cash
to fund the repurchase liabilities of
• Personal life insurance needs of
business owners and key executives.
To summarize, there is no better market
for the career advisor than the business-
owned market. Business owners are
affluent, have the need for life insurance
and disability products and can be seen
during daytime hours. Best of all, they
make decisions-because that is what
they do all day, every day.
The decision to hire a financial advisor
to do their business planning is the best
business decision they will ever make for
themselves, for their families and for their
My question is, are you that advisor?
Are you ready to be the advisor that will
save the family business, save the family
from feuding and save the employees'