One very interesting case I had recently involved a client and a buy-sell agreement. I was trying to convince the client about the benefits of funding it with life insurance.

The client owned a wine distribution company in Canada. When you have that kind of business, you need a lot of cash because you’re bringing in inventory, then slowly selling it off until you make a profit — and then do it all over again.

As I was looking over his financial plan, the client told me he had two partners, and all three were in their 50s and fairly healthy. So, I asked what would happen if one of the partners died from a heart attack or from a collision with a drunken driver. He responded that they have a buy-sell agreement and should one of them die, the surviving partners get paid $1 million for their shares. Then I asked where the $1 million would come from.

“We have a cash component that we buy inventory with,” he said. “It has a float of about $12 million, and we would just take a million bucks out of it.”

I kind of smiled and said, “Well, that’s great. But if I was representing your company, I would say that you were taking undue advantage of it, and that’s not fair.” And he goes, “Well, what do you mean it’s not fair?”

I explained, “You’re discriminating against your company because you could ask an insurance company to insure each of you for $1 million. Each one of you could buy life insurance, assuming you qualified; you all seem pretty healthy. It would probably cost $50 a month per person for a 10-year term. Over 10 years, you would pay a maximum of $18,000 for these three policies, and that could potentially save you not only $1 million, but if you all died, it would be $3 million. However, in your scenario, your company might have to pay out $3 million versus $18,000, and even the interest on that $12 million would easily take care of the $18,000 you’re going to pay over 10 years. So why are you discriminating against your own company?”

The client responded, “I never thought we needed insurance. When I was broke, I bought insurance because I didn’t have any money. But now that I have money, I thought I could just self-insure. In fact, I didn’t even look at self-insuring; I thought I could just use my own money. But what you’re saying is it’s a more effective use of my money to pay the insurance companies for their coverage and take on that $1 million risk per person than me using the company’s money to pay this out.”

My advice made a lot of sense to him. The interest he and his partners would get on the $12 million was more than enough to pay for the insurance. He told me that many people had recommended he buy insurance; he just never understood why he should do it until I used that phrase, corporate discrimination. It clicked in his mind — if the company had to pay out a maximum of $18,000 versus a possible $3 million, that would be a dramatic difference.

The client said he had never really understood this until I explained it. And really, all I was doing was using what I’ve heard in MDRT: to try to describe it as it is. That’s where the word “discrimination” came from; I used it to help him understand that financially, the company was being discriminated against just because it had money. He was saying, “If the company had no money, I’d buy insurance.” Well, listen, if I’m the company, I would rather pay $18,000 over 10 years than a possible $3 million or even $1 million in any given year.

Scott Grant is a 24-year MDRT member from Vancouver, British Columbia, Canada. Contact him at scottg@ridgewealth.com.