Understanding the Agreement

Your business is your legacy. It is a part of you that lives on and needs nurturing every day.

A Buy & Sell Agreement, alternatively known as a buyout agreement or a business will work just like a prenuptial agreement between 2 or more business partners. Funded by life insurance policies, partners are beneficiaries to each other ensuring that in case one of the partners dies, their insurance money is used to buy out their share. Or keep their share alive by investing this money in business and their family can keep receiving their profit share.

Life insurance-funded Buy-sell agreements are an instrument to protect your business, your family, and your partners while offering a range of benefits.

How it Works

When a business owner invests in a Life Insurance policy that funds buy-sell agreement, they are making their company or the shareholders a beneficiary in their death benefits. Also, their family is paid their part of the profit in business or they get the cash when partners buy out the share of the policyholder. It is just a simple yet effective way to keep the company intact in case of the sudden death of a partner.

Highlights

Pros

  • Provides money to the deceased partner’s family.
  • Business continuity by making sure that there is money available for a buyout for partners
  • You can use the cash value accumulation in your policy to buy your interest in the business should you decide to leave, retire, or suffer a disability.
  • Prevents heirs of the deceased partner to become business partners
  • Quick cash to pay creditors, and prevent fire sales
  • The liquid cash received is tax-free

Cons

  • Cost of premium might be an added burden on the company especially if one of the partners has a pre-existing health condition making policies expensive

1. Entity Purchase Agreement

Also referred to as stock redemption agreement, the insurance proceeds are typically used to purchase the company interest of the deceased owner’s share at a predetermined amount. The real advantage is that the family of the deceased owner gets cash instead of non-marketable company stock and the remaining partner has full ownership of the business. It also safeguards the business from being dissolved in case a partner dies. And the business receives a quick inflow of cash that might come in handy if the business requires liquidity.

2. Cross-Purchase Agreement

In a cross-purchase agreement, normally used for large corporations, the company is made the owner as well as the beneficiary of the policies on all partners. That way, all the money flows back into the business.

3. Key Person Life Insurance

For sole proprietorships where a business owner does not have a direct heir knowledgeable enough to take over the business, life insurance-funded buy-sell agreements can nominate any key person or employee. This way family receives benefits and the company is prevented from being sold for pennies.