Although this may be difficult to determine, aspects to consider include the person's salary, industry knowledge, goodwill generated by the person, the cost of hiring a replacement, and the firm's outstanding loan balance. One rule of thumb is to buy three to five times the key person's salary. Another is to purchase a year's net earnings. The firm is to be the owner, premium payor, and beneficiary of policies on the lives of its owners. The business is to use the proceeds of the policy to purchase a deceased owner s interest from his or her estate.
Simplicity is desired.
The entity purchase plan requires fewer policies and less accounting than the cross-purchase plan if there are more than two owners. The business is in a lower tax bracket than owners, effectively lowering the cost of the plan. Pooling of premium shares is desired when there is an age disparity among the owners. An agreement is needed to continue the business after the death of an owner, free of conflicting interests. Survivors want a guarantee that funds will be available to purchase shares at the death of an owner.