As a qualified plan, an employee stock ownership plan (ESOP) is required to repurchase the shares of departing and retiring employees who participate in the plan. One of the most effective ways to help protect the business from both planned and unplanned events with an ESOP is by implementing an ESOP repurchase obligation funding strategy.
Many plan for this expense, at least in part, through a sinking fund (investments the company uses to accumulate the necessary funds to address this need). Life insurance can be one solution to accumulate these funds for lifetime buyouts, particularly because it can cover unexpected buyout expenses triggered by death, as well as transfers during life. Tax-deferred accumulation makes life insurance an effective option for accumulating funds for a lifetime buyout.
Related content: ESOPs
Using life insurance to create a sinking fund for repurchasing stock:
- Reduces and levelizes the cash flow required to repurchase shares in future years
- May be viewed positively by ESOP participants and trustee
- Finances the repurchase obligation and remains on the company's balance sheet
- Makes it available to any corporate purpose
- Doesn't protect the fund from creditor claims
- May be insufficient and the company is ultimately responsible for fulfilling ESOP repurchase obligations
Before the Sale
During the Sale
Sample Proposal (BB12162) | Request for Proposal (BB12174)
A customized proposal can be created by the Business and Advanced Solutions team by using the Request for Proposal below. It will be customized for your client with appropriate cover information, financial model and illustration.
View Sample Proposal (PDF) • View Request for Proposal (DOC)
Financial Models: Shows a sample of the financial model and illustration.
After the Sale
Tap in to Technology ESOP Services Flyer (PQ8305V)
Showcases the benefits of technologies such as My Principal ESOP Repurchase Liability Solution (My PERLS), e-Distribution and e-Diversification services.
View (PDF) • Order
Key materials listed below.
ESOP Repurchase Success Story (BB12184)
See how using life insurance to fund repurchase obligations helped this company set aside funds for future needs.
ESOP Planning Opportunities Presentation (BB12300)
Provides an overview of what Employee Stock Ownership Plans are, how they work and the opportunities they present for advisors.
Business Submission Checklist (DD849R)
Form that must be used when submitting Life applications to BMA to fund business solutions.