Buy-Sell Agreements & Life Insurance

A Match Made in Business Heaven

A buy-sell agreement is a legal contract that outlines how the ownership of a business will be transferred in the event of a partner's death, disability, or retirement. Life insurance is often used to fund a buy-sell agreement, as it provides a source of liquidity to the surviving partners or the business to purchase the deceased partner's interest.

There are two main types of buy-sell agreements: cross-purchase agreements and entity purchase agreements.

  • Cross-purchase agreements are the most common type of buy-sell agreement. In a cross-purchase agreement, each partner buys a life insurance policy on the lives of the other partners. This way, if a partner dies, the proceeds of the life insurance policy can be used to purchase the deceased partner's interest in the business from their estate.
  • Entity purchase agreements are less common than cross-purchase agreements. In an entity purchase agreement, the business itself buys life insurance policies on the lives of the partners. This way, if a partner dies, the business can use the proceeds of the life insurance policy to purchase the deceased partner's interest in the business from their estate.

There are several benefits to using life insurance to fund a buy-sell agreement. First, life insurance provides a source of liquidity that can be used to purchase the deceased partner's interest. This can be especially important if the deceased partner's family does not have the resources to purchase the interest themselves. Second, life insurance can help to avoid probate, which can be a lengthy and costly process. Third, life insurance can help to protect the business from financial hardship in the event of a partner's death.

If you are a business owner, you should consider working with an attorney to create a buy-sell agreement. A buy-sell agreement can help to ensure that your business is able to continue operating smoothly in the event of a partner's death, disability, or retirement. Life insurance can be a valuable tool to help fund a buy-sell agreement, and it can provide peace of mind to you and your partners.

Here are some additional tips for business owners considering a life insurance buy-sell agreement:

  • Get professional advice from an attorney and an insurance agent.
  • Make sure the buy-sell agreement is tailored to your specific business needs.
  • Consider the type of life insurance policy that is right for you.
  • Keep the buy-sell agreement up-to-date as your business changes.

A life insurance buy-sell agreement can be a valuable tool for business owners who want to ensure the continuity of their business. By working with an attorney and an insurance agent, you can create a buy-sell agreement that meets your specific needs and helps to protect your business.