Previously on this blog, we’ve touched upon using indexed universal life for some seemingly unconventional purposes such as retirement planning and mortgage protection. One of the other things indexed universal life insurance policies are commonly used for is funding buy-sell agreements between two business owners. Let’s examine some reasons why more business owners should follow suit and consider funding buy sell agreements with indexed universal life insurance.
It’s safer than just saving up.
While there are different ways to structure a buy-sell agreement, it will always bind business owners to buy out the other owner or the owner’s estate at the moment the other owner dies, becomes disabled or leaves the business. Those are all things that can happen at any moment and for any reason (no one is planning on getting into an accident or falling out with their business partner after all), so it’s not wise to count on having enough saved up in a sinking fund by the time it happens. Counting on the possibility of getting a loan is also not a very good option, as it would put a considerable financial strain on the business or the remaining owner’s family. Getting insured will always be the best policy in situations like these.
IULs are better for this purpose than term insurance because of cash value benefits.
Term life insurance is the easiest to understand and implement, and it’s very tempting for small business owners on a tighter budget because the premiums are lower. However, term life insurance only provides death benefits, and only if the insured dies within the term of the policy. In the best case, you will have to purchase more life insurance after a certain amount of time. In the worst case, you simply won’t accumulate enough money to make a down payment at the time of your business partner’s death. Or, you won’t have adequate protection in case of disability and other possible scenarios.
Permanent life insurance is the better policy, but there are several types of permanent life insurance to consider. Indexed Universal Life hits that sweet spot that fills a lot of people’s needs: you get more for your money than you would with a fixed rate universal life policy, but yet it’s not as unpredictable and risky as variable universal life. With IULs, a part of your premium will go towards accumulating cash value in an indexed account whose rate of growth is generally linked to the market index of your choice. Although, you do not actually invest money into these indexes.
You can always access the cash you have accumulated in the form of a tax-free loan or withdrawal, so it allows you living benefits. The policy value will depend on how much you pay and how well the market index performs, and while there are some caps on how much you can earn, you are protected against major losses in a way you wouldn’t be if you invested in those markets yourself.
The flexibility of IULs will allow you to adjust the policy to your needs.
You can add a disability buyout policy to help fund the purchase of the business should any of you become disabled. Also, the policy can remain in force until you need the death benefit as well if you add a disability waiver. You can choose between lots of features that will fit your needs the best. For example, you can pick between having a level death benefit, which keeps your premiums lower, or an increased death benefit. The increased death benefit allows you to meet all your future obligations even if your business increases in value. The premiums are higher in this case. But, paying more will also allow you to accumulate cash faster in case you need to access the funds for a lifetime buyout sooner. It’s a question of deciding what sort of outcome you would rather prepare for. While it’s not comfortable to think about these things, your business could absolutely crash and burn without this kind of protection.
Funding buy sell agreements with indexed universal life
IULs are far from a one-size-fits-all solution, and they will not be perfect for all people in all situations. However, since with the addition of a disability buyout policy can provide you with sufficient protection in all triggering events, it is worth considering funding, at least, a part of your buy sell agreements with indexed universal life. It is impossible to completely control what will happen to your business after you or your partner is gone. Yet, in this day and age, help is only a few clicks away. Ogletree Financial Services has helped many entrepreneurs gain this precious peace of mind.
You don’t have to make this decision alone: if you want to get in touch and see if IUL is the solution for your business, you can simply request a customized quote through the contact form or get in touch with us at 1-800-712-8519.