Value of Life Insurance in Buy-Sell Agreements

Course: Insurance Planning
Lesson 17: Business Uses of Life Insurance

Student Question:

Do Buy-Sell Agreements account for projected growth of the company?  Do the life insurance benefits increase over time to account for projected growth, or perhaps can they invest and grow conservatively to keep up with inflation (or COLA on the plan)? 

Thanks,

Thomas


Instructor Response:

Hi Thomas,

A well-drafted agreement would set the share value based on a formula or call for a periodic re-appraisal of the value of the shares.  For example, shares could be valued based on 10 times average pre-tax earnings over the last three years.

Assuming continued insurability of the shareholders, the death benefit may be adjusted periodically to match the share price formula.  If the shareholders cannot or choose not to adjust the death benefit, there should be a mechanism to pay the deceased shareholder’s family any difference between formula valuation and death benefit.  One approach is to pay the entire death benefit to the family and, to the extent that share value exceeded death benefit, pay the difference using an installment note.

Let me know if you have any other questions.

Bruce