If you co-own a business, one of your primary concerns must be business continuity if one partner dies or becomes permanently disabled. A buy sell life insurance agreement can provide just that.
Without careful planning, the survivor may not have complete control over the transfer of the business. Entering into a buy sell agreement with your business partners will clearly outline the details of the business transfer. It will also give the surviving partners the control needed to safeguard the company’s future.
A properly funded buy-sell agreement will ensure that the business has the funds required to purchase the business interests from the deceased partner’s heirs.
You never know what tomorrow may bring. So, it’s very important that you plan for the worst. You can’t avoid the inevitable, but you never know when something tragic is going to happen to you.
Failure to plan could mean unnecessary hardships for your loved ones as well as your business. This post is going to look at one of the most productive ways that you can secure the future of your family and your business.
Benefits of a Buy-Sell Agreement
You’ll need to hire a business or tax lawyer to help you draft the buy-sell agreement. Although there’ll be costs involved, they’re nothing compared to the benefits. A buy-sell agreement will eliminate family feuds, keep the business afloat, and prevent problems with liquidity.
Types of Buy-Sell Life Insurance Agreements
There are three main types of buy/sell life insurance agreements that you should know about. They are:
Cross-purchase plan
In a cross-purchase plan, every shareholder owns a life insurance policy on the other business owners. Therefore, if one owner dies or becomes permanently disabled, the life insurance proceeds from the policies held by the other survivors will cover the cost of purchasing the deceased owner’s interests.
The policy ensures that each partner has access to funds to purchase the departed owner’s shares without compromising the company’s liquidity. A cross-purchase plan is not realistic if there are multiple partners in the business. Purchasing multiple policies can get very expensive.
Corporate Entity Redemption Plan
Instead of partners holding the policies, the business owns life insurance policies on each owner. Therefore, if one partner dies or becomes permanently disabled, the company will buy out the deceased owner’s shares with the life insurance benefits. A corporate entity is ideal in cases where there are multiple owners in the company.
The shares the company buys will not increase the number of shares the other partners own. This is because the shares are not purchased in their names. However, one partner’s death and resulting buy-out will increase each of the surviving partner’s percentage.
Wait and See Plan
A wait and see plan combines the cross-purchase and corporate entity redemption plans. This scheme gives the surviving parties the option to buy out the deceased partner’s interest in the event of death.
Funding Your Buy-Sell Agreement
Most buy/sell agreements are funded by a life insurance policy. There are other options, of course, but the insurance benefits will ensure that there’s cash available when the time comes.
Advantages of using life insurance include:
- It provides a cash lump sum to fund the agreement at death
- Almost immediate payouts to settle the buy/sell agreement without delay
- Proceeds are usually income tax-free
- Some policies build cash value, which can be used to purchase a partner’s interest after death or disability.
Disadvantages of using life insurance include:
- Premiums are paid with after-tax dollars
- Premiums are an ongoing expense
- Illness or age can result in denied insurance for one or more partners
- Discrepancies in premiums based on the partners’ age – a younger partner will pay more to insure an older partner
Uncertainties, such as illness, death, and injury, can affect the financial health of your business. Partners in the business are exposed to the risk of a substantial financial loss if one partner dies or becomes disabled. A buy/sell agreement, funded with insurance, eliminates the risks and ensures a smooth business transition, even in trying times.
It may not be pleasant to think about, but imagine if something unforeseen happened to you. Would your partner be able to shoulder the expenses alone?
The fact is, that without life insurance (in this case, key man insurance), your business could face severe financial problems if something tragic were to occur. In this regard, a key man policy helps you prepare for such unexpected events.
Getting a Buy-Sell Agreement
The million-dollar question is, “how much is this going to cost?” After all, if you’re a business owner, you are always concerned about the bottom line.
Luckily, it’s easy to find a life insurance plan that will fit into your budget. Making a few simple lifestyle changes can drastically lower how much you or your business partner pay for your plan.
One of the most important things you and your business partner can do to decrease life insurance policy premium costs is to stop using tobacco. Life insurance premiums for smokers can have drastically higher premium rates than those of non-smokers.
In fact, smokers will often pay more than double in life insurance premium costs compared to a non-smoker. By simply cutting out tobacco use, you could potentially save yourself thousands in premium costs.
To save as much money as possible on your premiums, it’s important to compare rates across many different plans. But where should you start? With more than 800 companies on the market, shopping for the best price can certainly seem like a daunting task.
After all, each insurance company varies in its offerings based on its rating system and underwriting process. So, instead of trying to compare hundreds of rates on your own, let one of our independent brokers do the heavy lifting of rate shopping for you.
A traditional insurance agent might work with one particular company. But, our agents will shop dozens of insurance companies for you and provide personalized rates directly to you.
Many traditional agents work with a single insurance company. However, our brokers will bring personalized rates directly to you. And, instead of providing rates from only one company, we will provide you with quotes from reputable companies from all over the U.S.
How Large of a Buy-Sell Agreement Do You Need?
There are many factors to consider in determining how much coverage you should purchase. There are several things you should add up. When deciding how much to buy, you should consider your business expenses and decide how much it would cost to replace you at your business.
The more integral you are to your business, and the more it would take to replace you, the larger your policy should be.
Also, you should determine how much it would cost for your business partners to pay out your portion of the business. Not only will this help your co-owner, it will also help your family.
Last Thing on Buy-Sell Agreements
Not only should you purchase a plan that protects your business, but you should also buy a plan which will cover your family members. Your business is not the only debt that could be left behind for your family to tend to.
Your family members could also be stuck with your mortgage payments, credit card bills, car loans, and many other expenses. Life insurance provides your family with the money and financial stability they need after experiencing the loss of a loved one. Life is full of unexpected turns.
Because you never know what might happen tomorrow, it’s important to plan ahead now to ensure that your family and loved ones will be protected and provided for in the event of a tragedy. Purchasing life insurance is a responsible and caring thing to do.
It can prevent your family from being burdened with expenses and a potentially crippling amount of debt with no way to pay for it. Although nothing can prepare you for the emotional struggle of losing someone you love, life insurance can help eliminate the financial struggles that can come along with it.
If you have questions or want to learn more about life insurance or a buy/sell agreement for your business, please contact us and one of our agents will contact you. We can help to ensure that you receive the best information as well as the best possible rates for your policy.
Learn about the type of insurance and coverage amounts you’ll need to fund your agreement and ensure the success of your business for future generations.
You can also compare quotes for life insurance using our insurance quoter on this page and get started with the process of buying buy-sell life insurance.
