Funding a buy-sell agreement with life insurance offers business owners and their families peace of mind. Buy-sell agreements ensure business continuity if an owner dies or needs to withdraw from the company for other reasons. The cost of life insurance premiums pales compared to the financial security the right policies can provide. Take a few minutes to learn how buy-sell agreements work, why they’re essential, and how they can benefit your business.

What Does Life Insurance Funding for Buy-Sell Agreements Mean?

Buy-sell agreements help ensure business continuity, even if the individual owners or partners change. The agreement consists of a contract that specifies the disposition of an owner’s share in case that individual passes away. Some also cover an owner’s withdrawal from the business for other reasons, like disability or retirement.

Typically, the contract will specify that a deceased owner’s share will pass to the remaining partners or the business. The business or the partners can use the proceeds from a life insurance policy to pay the heirs for any share of the company they inherited. Other features of life insurance policies can provide funding for retired or disabled owners. These contracts can also help plan to bring new owners into the business upon the departure of a current one.


How Does Life Insurance Funding for a Buy-Sell Agreement Work?

Buy-sell agreements in case of an owner’s death often follow one of these models:

  • Cross-purchase: Each owner buys a policy on the life of every other owner, pays the premiums, and names themselves as the beneficiary. If one of the owners passes away, the survivors can use the proceeds from the policy to pay heirs for their shares, according to the buy-sell agreement.
  • Entity redemption: The business buys life insurance policies for the owners, pays the premium, and names itself as the beneficiary. In this case, the company will use the proceeds to redeem the deceased owner’s shares from heirs.

Hybrid Buy-Sell Agreements

The right life insurance policy can help the company prepare for various circumstances. Some businesses vary the way they structure life insurance funding to satisfy various needs and business plans.

For instance:

  • A business policy may name heirs as beneficiaries, so they receive their money directly from the policy. Typically, the government doesn’t tax the proceeds from life insurance policies.
  • Sometimes, agreements will also allow key employees, which could be family members, to purchase ownership shares. For example, a business owner might use one of these contracts to ensure a son or daughter takes over their ownership share. The policy will provide the funding to buy the owner’s shares.

Life Insurance Funding in Case of Disability or Retirement

Whole and universal life insurance grow a cash value over time, in addition to offering a death benefit. Thus, some life insurance policies can serve as handy tools to raise money during the insured person’s life. For instance:

  • Owners who wish to retire or become disabled could cash in or borrow against the policy for extra income.
  • Cash value policies that cover individuals over 65 may also qualify for a senior life settlement, which will pay cash in exchange for some percentage of the death benefit.

Benefrts of Buy-Sell Life Insurance Policies

Life insurance companies typically pay immediately upon receipt of a death certificate. Thus, a policy can provide quick funding to settle the buy-sell contract without forcing the company to liquidate any assets for cash. The heirs will also appreciate rapid access to their cash settlement to alleviate concerns over losing the deceased owner’s income. The remaining business owners can use the money to ensure they fulfill the contract and swiftly resume normal operations.
Partnerships, corporations, and sole proprietorships can benefit from a buy-sell agreement funded by the right life insurance policy. Speak with experienced business insurance agents at The Insurance Hub about your vision for the future of your business.


Check Out Our Other Services!

Contact The Insurance Hub Today!