News flash! Selling life insurance to business owners is a great way to increase your average premium per sale, and if you're lucky enough to have an existing commercial P&C book of business, cross selling and rounding out your accounts has never been easier!
By the end of this article you will better understand the massive opportunity cross selling life insurance to business owners holds for your business, confidently explain the role life insurance plays in funding a buy-sell agreement and, most importantly, continue to provide value to your clients.
Your clients already know and trust you which means you've already overcome the toughest part of the sales process. Plus, they depend on you to educate and guide them to best protect their business, and that requires dedication to continuing education on your part.
Learning how business owners use life insurance is a sure-fire way to put you in the position for better conversations, writing bigger deals and earning top life insurance commissions.
Before we dive into the guts of buy-sell, you need to be aware of how business owners use life insurance in their succession plans. In addition to buy-sell agreements, there are several important ways life insurance is used in business:
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- Buy-sell agreements
- Key man protection
- Executive compensation plans, such as a 162 plan
- Non-qualified deferred compensation, and
- Securing refinancing of Small Business Administration (SBA) loans
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What is a buy-sell agreement?
Buy-sell agreements facilitate the sale and purchase of a business upon a specified event. Events that often trigger the sale of a business include death, disability or retirement of an owner. Buy-sell agreements are most commonly used to protect the business upon the death of the owner.
A buy-sell will define who gets what and how much while guaranteeing the buyer a predetermined price. Having a buy-sell agreement in place will also make it easier to work with creditors as they see a business has the proper protection in place, making loan decisions easier. Last, and not unimportant, is a buy-sell allows the purchase of the shares from the surviving family's estate.
The buy-sell should be drafted by the business owner's attorney and reviewed by their CPA. Upon approval, your role will be making sure they are properly funding the agreement with life insurance. (This would be a good time for you to start thinking about how many attorneys are in your natural network and would be willing to create a strategic partnership.)
There are many compelling reasons to start talking about life insurance with business owners. Whether you have a natural network of business owners or a strong commercial book of business, if you're not offering life insurance to them, someone else is.
There are several reasons business owners should consider buy-sell agreements, including establishing a price for the business and ensuring non-business family members are cared for. (Photo: iStock)
4 key funding basics of buy-sell agreements
Below are the four most common ways to fund a buy-sell agreement:
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- Get a loan: Loans can be used to purchase the business upon death of the owner or partner. This requires borrowing the purchase price while using future business profits to repay the loan and any associated interest.
- Installments: Sometimes installment plans are put in place after the owner's death, which can, of course, cause financial strain on the business. Also, payments to the deceased owner's estate depend solely on the success of the business.
- Cash isn't always king: The purchasing partner could use cash to purchase the business. This can take many years and isn't always the best use of cash reserves and not always available if the purchase of the business needs to happen quickly.
- Life Insurance: Life insurance guarantees funds will be available and distributed exactly the way the owner intended to ensure future success of the business.
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Knowing the various funding mechanisms for buy-sells will position you to win the business and get more life insurance referrals. Take the time, do your research and position yourself to educate business owners how they can use life insurance.
Five reasons business owners should have a buy-sell in place
1. Control: It's important for an owner to have the peace of mind they have put the right tools in place to ensure the success of their business after they are gone.
2. Guarantee a buyer: When planned in advanced the owner knows with certainty the buyer is in place and there won't be questions on getting the funding secured.
3. Predetermined Price: Having a predetermined price eliminates the stress of negotiations.
4. Tax relief: If the death benefit is equal to the value of the deceased's portion of the business, there is no taxable gain for federal income tax purposes. And, if certain requirements are met, the predetermined price in the buy-sell agreement will fix the value of the business for federal estate tax.
5. Fairly treat non-business family members: Having the details hammered out ahead of time ensures the family is taken care of and not put in a compromising position.
Using life insurance to address business succession planning can also help with employee retention and provide tax advantages to the business.
As the agent, knowing how to pivot your discussions is key to helping your clients understand their need to start considering a business succession plan. What they plan on doing after they retire or pass away is likely a big concern for their business partners, employees and family.
Plant the buy-sell lead seed
One of the best pieces of advice I ever received was to always make sure you are planting seeds for future sales. The questions you ask in every scenario will impact your ability to increase your policies per household, which of course drives retention. Business scenarios are no different; ask the key questions to plant the seed for future sales if you want to cross sell life insurance.
