In this case study, the goal was to ensure the proper amount of coverage was in place for a commodities firm whose business was rapidly expanding. As a result of the rapid growth, the CEO’s share value increased by 250% since the last buy-sell agreement. It was determined by the board that the disability buy-out exposure would cripple the company should the CEO become disabled.
The annual premium on this case was roughly $110,000 + taxes and fees.
Client
A large firm located in Texas whose business involves grain, energy, freight and other commodities.
Situation
The client maintained a buy-sell agreement that failed to keep pace with the rapid growth of the business. The size of the insurance portfolio that was constructed to protect the shareholders required significant increases. The company board, consisting of a dozen shareholders, wanted $33 million of coverage to fulfill the funding obligations on the commodities company’s founder and CEO. The existing life insurance on the CEO only protected $13 million, and his disability buy-out insurance rested at an even lower level, thus there was the need for additional protection.
Assessment
It was agreed that should adequate coverage not be in place and the CEO become disabled, that the cash strain would cripple the organization.
Solution
This risk was alleviated by designing a disability buy-out plan providing the additional benefits required to protect the organization from the $33 million disability exposure.
Result
The advisor procured additional term life insurance protection to fully fund the death repurchase clause of the buy-sell agreement. A disability buy-sell policy was funded to a $33 million limit to pay a lump sum benefit if the CEO were to become disabled, pursuant to the definitions and trigger language of the disability repurchase clause.
Sales Tip: For productive business succession planning discussions, ask your client/prospect the following 4 questions:
Do you know the value of your business?
Do you have a buy-sell agreement?
Has your agreement been impacted by any change in the value of your company? Or have you added/subtracted any partners?
Without a buy-sell agreement, did you know that you could go into business with your partner’s spouse in the event they die or become disabled?
As always, please feel welcome to contact your DI Associate regarding solutions and strategies.