No one in business dies with everything done. The way to die neat is to own enough life insurance to allow the others to buy their way out of the problems that come up. Cancelled contracts, borrowing arrangements, suppliers and employees who need reassurance, customers too. Skilled people to pick up some of the responsibilities. All can be had with enough money.
The loss of a partner and key person is serious and adds the weight of buying their shares from their estate. It is never convenient and when coupled with the unexpected hole in the businesses skill set, it can become insurmountable.
Many years ago I approached a business that developed real estate and built homes. They had two shareholders. The two had different skills, one who was the construction guy and the other did the things to acquire land and to get it ready to build upon.
As always, they did not want to talk about premature death and their excuse was, “We are just now working out our shareholder agreement and it will include a buy-sell clause in the event of death. Let’s talk when it is done and we are past our busy time on the construction side.”
Being new in the business at that time, insurance was a bit of an abstraction. I let them wait.
Of course, the construction executive died and eventually the other went bankrupt after paying the widow about a third of the value that the company had had earlier. I doubt this is the only example of its kind.
The point is that a business can have an agreement or not and it can be funded with life insurance or not. Good agreement and well funded is the best place. Neither is the worst. In the middle we have the case where there is an agreement and no insurance or insurance and no agreement.
There is a simple question in cases like this.
“Would having the insurance money and no agreement be easier to deal with than having an agreement and no money?”
The world is a fundamentally simple place and for life insurance folks, there are two realities.
Money solves more problems than agreements and people don’t want to take the hour or two it would take to organize the life insurance.
When nothing happens they win small. When something does happen, they lose big. That is the exact opposite of the conditions wealthy people try to put in place. They have observed that they are not always right. To create wealth, they must begin many projects. Their key is to lose small when they are wrong and win big when they are right.
Premature death is a condition most of them address. A tech entrepreneur in California recently bought a policy with initial insurance in excess of $200 million. Probably he did not “need” it in the conventional sense, but it solves problems he can see. Malcolm Forbes, who could have gotten financial advice from anyone in the world, owned more than $70 million of coverage when he died nearly three decades ago.
Life insurance solves problems by making money available to the estate. There is no more efficient way to do it. Wealthy people like efficient solutions to difficult problems, and they especially like ones that do not have ongoing management issues.
Focus on the correct issue. Premature death is a problem and has a huge cost. Life insurance is a solution and cannot therefore be the cost. Think it through.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772