At some point in their careers, successful producers take their practices to the next level by seeking clients who have a high net worth and hence, a larger problem to solve. Many of these affluent individuals have one thing in common: They own and operate a small-to-medium size business in which their role in operations is critical.
Advisors take classes to help them understand the needs of affluent business owners and the psychology of triggering a decision to exchange money for protection against the unthinkable. The Question is: Are advisors focusing on the right risks? If not, they may be leaving these clients exposed to a potential disaster while overlooking significant revenue opportunities.
The buy-sell agreement
Advisors to business owners focus on how to structure a timely exit from the business under circumstances the business owner knows and controls. These exit plans usually are rooted in a legal document, the buy-sell agreement, which is drafted by an attorney. Usually the agreement will address how the transition is to occur in the event of the owner’s retirement, death or disability. Finding an appropriate and able buyer, and coming to a mutually agreeable price for the business, is paramount.
Once this is determined, protecting both the buyer and seller against premature death or disability becomes the next logical step. Often the actual legal document will explain in detail what is to occur under these circumstances, but the question inevitably becomes, where will the money come from?
Life insurance can cover this obligation and often offers the buyer and seller the most flexibility and peace of mind. The risk of death can be transferred to an insurance company for a fixed cost that can be controlled. And the benefits are well defined. So, there are few or no surprises.
Basic financial planning tells us to save for the small events and insure against the large, unknown, occurrences. One would think those events posing the greatest risks would be addressed first. But in my experience this often doesn’t happen.
Of the underwhelming number of buy-sell agreements that are actually funded, most only address the untimely death of either the buyer or seller. They don’t take into consideration a disability, which is more likely to happen; and, when it does, is more complex.
The living dead