I’m having more and more discussions with business owners about harmony within their families and businesses. How do you navigate that, and how do you help these families move forward so that their goals of financial security for themselves and peace of mind and harmony for their family legacy are met?
If you are a business owner, you might worry, How am I going to grow my business? My supply costs may have gone up. My cost of labor has gone up. It’s harder to make that profit today.
Case study: The cost of borrowing
One area that we’re finding business owners are really concerned about now, and I think you can use this when you are positioning life insurance, is the cost of borrowing. I talked to a business owner who owns a group of car washes, and he told me he just closed on a loan. His previous financing was at 6.5%. His financing costs went up to 10%. This happens to business owners all over the world. Interest rates can spike quickly, and anyone who’s trying to refinance faces difficulties with cash flow.
Then that leads to the owner’s financial security and buy-sell and business planning exit, including estate distribution. Life insurance can help minimize some of the risks in these other areas.
Buying out a business with life insurance
Let’s look at the two ways you can buy out a business, and it’s the reason most buy-sell agreements, should be covered with life insurance, and they should be covered with permanent insurance because it’s not a temporary need.
So, if we use insurance to buy out a company that has a buy-out cost of $5 million with a net profit margin of 15%, what’s the cost of that buyout? We know it’s the cost of the annual premium payment because we can buy a policy to provide a tax-free benefit of $5 million. But what if the business just waits, and they buy out the interest of the deceased person with the earnings of the company instead? What’s the cost of that buyout going to go to?
At a 15% profit margin, you take the buyout for the money you need and divide it by that 15%. They need to generate $33 million of additional revenue to fund that buyout. When you show that to a business owner, I’ve never had a business owner say, “Oh, yeah, I don’t want to use life insurance. The person who succeeds me can do that.”
If you show it to a business owner’s spouse, they are going to say, “There is no way that person without my spouse is going to be able to generate that additional revenue just to give it to me.” So, I believe what we offer is so compelling.
Then, of course, if the owners use permanent insurance to fund their buyout, it can then be used to create additional retirement income once they are retired, or perhaps it can be used to provide cash for estate taxes or equalize the estate with other family members.
Excerpted from Hall’s 2022 Top of the Table Annual Meeting presentation, “How life insurance is liquidity when you need it most.” (MDRT member-exclusive content)
Carrie Hall is a 31-year MDRT member. She’s also a Top of the Table member.
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