Getting Personal With Buy-Sell Planning
Caroline Brooks & John Harrison
September 2017

Many business owners understand the importance of succession planning but view it as a “tomorrow” issue because they are prioritizing other issues “today.” These owners are busy running the business, raising families, and saving for their own retirement–planning for their exit from the business seems far into the future.  Moreover, because most buy-sell plans are funded with life insurance owned by the business or the owner’s partners, some owners are reluctant to give someone else control over a life insurance policy on his or her life. 

If there was a way to combine planning for personal needs with business needs into one overall plan, the business owner might have more of an incentive to make business succession planning a priority today. Personal ownership of the life insurance policy might be the perfect solution to allow the owner to satisfy his or her buy-sell obligations while simultaneously having access to the policy for personal planning needs.  

Let’s get personal:  
Life insurance can offer the business owner:

  • Protection for the ones they love. The death benefit is received on a tax-free basis and can be used to satisfy business succession and personal needs.
  • Tax-favored access to policy cash values to supplement income—including retirement income, college funding and more.
  • Long term care coverage. If long-term care is needed, the business owner could explore the long term care options available in a permanent policy.
  • Incentives and rewards to living a healthy life.  
  • An attractive internal rate of return.  Due to the tax-free nature of a life insurance, the rate of return when compared to a taxable investment is competitive to business owners who may always be looking at the bottom line. 

In addition to these personal benefits, life insurance can be customized to suit the needs of the business owner depending on the owner’s wants and needs. 

Let’s get down to business:
Consider how single-owner businesses and multiple-owner businesses can structure buy-sell plans to incorporate personal ownership: 

Profile: Single-Owner Business
Personal Key Person
The viability and success of a single-owner business falls on the owner’s shoulders. Besides being key to the business itself, the owner, by extension, is also key to his or her family’s current and future financial security.  Succession planning is primarily about ensuring that the owner’s family can continue to prosper once he or she is no longer involved in the business because there is often no identified successor. Therefore, finding a solution that will meet both the business and personal needs of the owner is often essential. 

A personal key person life insurance policy may be the answer. In a personal key person plan, a permanent life insurance policy is owned by the business owner on his or her life. This type of plan can offer maximum control, flexibility and protection for a sole business owner and his or her family in all phases of life. Consider the ways life insurance can help:

  • Tax-free death benefit protects the owner’s family by replacing income due to premature death and preserves the value of the business for the owner’s loved ones. Moreover, if the owner has multiple beneficiaries and only one who will take over the business, the death benefit can equalize the estate among the heirs.
  • Supplemental income as a retirement backstop: Various unforeseen factors may diminish an owner’s savings more quickly than anticipated such as a below-market sale of the business, market downturn, health care issues, increased taxes in retirement and/or the owner or spouse living beyond life expectancy. Access to policy cash value via tax-favored loans and withdrawals may provide an essential backstop if the owner outlives his or her primary retirement savings.
  • Long Term Care: A prolonged long term care event could significantly impact an owner’s ability to work and produce income. Likewise, large withdrawals to pay for care could quickly deplete retirement savings. Many life insurance policies offer options that could potentially cover long term care needs.  

Profile: Multiple-Owners Business
Solution: Cross Endorsement Buy-Sell (CEBS)
Combining personal needs with business needs when designing a buy-sell strategy is often very difficult when there are multiple owners of the business because most traditional buy-sell plans, such as cross purchase and entity purchase, require that someone other than the insured own the life insurance policy.  

A CEBS plan is unique–the insured owns the policy on his life and can design the policy for his personal needs in addition to the needs of the buy-sell plan.  Each insured will “endorse” a portion of his death benefit to the other business owners and collect a rental charge from them annually.  The rental charge will be equal to the “economic benefit” cost similar to those charged in split dollar arrangements.  The CEBS design is easy to administer and requires only one life insurance policy for each business owner.

If the insured dies, the other owners will use the death benefit received to buy out the deceased owner’s shares per the terms of the buy-sell agreement.  Any additional death benefit that the insured may have purchased will pass to his designated beneficiaries.  Alternatively, the policy cash value may be accessed to fund a lifetime buy-out of the business.

When the buy-sell plan ends: 1) there is no need to swap or transfer policies; and, 2) any policy cash value belongs to the insured for use at his discretion, such as to supplement retirement income. The insured can also take advantage of powerful features that can enhance the benefit and flexibility of the life insurance policy, such as options which can help preserve other assets in the event of a long term care need. 

The insured can purchase a product that best meets his goals, such as:  1) Using a high cash value product to overfund the premium to build cash value; or, 2) Using a low-cost death benefit product to buy additional death benefit for his family or estate planning needs. If estate planning is a priority, use of an irrevocable life insurance trust (ILIT) to own the policy may be advisable. 

Things the business owners will want to consider include:  1) Transfer for Value; 2) Income Taxation; 3) Estate Taxation.  Each insured should consult their legal/tax advisors for advice on these matters.

Final Thoughts:
Whether a business is owned by one person or by multiple people it is possible to structure a buy-sell plan that combines personal planning with business planning.  The insured can structure the life insurance policy to include additional features that makes this planning more powerful and flexible, providing incentive to the business owner to move forward with this critical planning–not just for his business but for himself and his family.

For Financial Professional Use Only.  Not intended for use with the General Public.

This material does not constitute tax, legal, investment or accounting advice and is not intended for use by a taxpayer for the purposes of avoiding any IRS penalty.   Comments on taxation are based on tax law current as of the time we produced the material.

All information and materials provided by John Hancock are to support the marketing and sale of our products and services, and are not intended to be impartial advice or recommendations. John Hancock and its representatives will receive compensation from such sales or services.  Anyone interested in these transactions or topics may want to seek advice based on his or her particular circumstances from independent advisors.

Loans and withdrawals will reduce the death benefit, cash surrender value, and may cause the policy to lapse. Lapse or surrender of a policy with a loan may cause the recognition of taxable income. Policies classified as modified endowment contracts may be subject to tax when a loan or withdrawal is made.  A federal tax penalty of 10 percent may also apply if the loan or withdrawal is taken prior to age 59 1/2.

Life insurance death benefit proceeds are generally excludable from the beneficiary’s gross income for income tax purposes. There are few exceptions such as when a life insurance policy has been transferred for valuable consideration.

Author's Bio
Caroline Brooks
JD, CFP®, is an associate counsel in the Advanced Markets Group of John Hancock (USA) in Boston, providing advanced marketing support to home office employees, field personnel, and producers. Prior to joining John Hancock, Brooks was a member of U.S. Trust’s Wealth Strategies group and worked as a financial planner for Lake Street Advisors. Brooks received her BA, magna cum laude, in Criminal Justice and Political Science from the University at Albany, SUNY, in Albany, NY. Brooks received her JD with a concentration in Estate Planning and her MBA from Western New England University School of Law, Springfield, MA. Brooks can be contacted via email at:

John Harrison
CLU, ChFC, CASL, FLMI, director, Advanced Markets Group of John Hancock (USA) joined the team in 2001 and specializes in executive benefits and business planning. The consultant team focuses on case design and sales support to producers in the field and other departments in the home office. Prior to joining John Hancock, Harrison worked 10 years for one of the world’s largest insurance brokerage companies in their executive benefits division in Boston. He began his insurance career with the Boston branch of Manulife Financial in 1988, working in the Brokerage division. Harrison can be contacted via email at:

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