How To Use Life Insurance In A Buy Sell Agreement
Life insurance has developed in many ways since it first came to exist. From its original use to help spouses in the situation where there is a death of a loved one to the present situation where it helps pay for funeral expenses or can become an investment for the children left behind. Another usage of life insurance is for business owners.
What Is A Buy Sell Agreement?
A buy sell agreement is a type of business contract funded by a life insurance agreement. Essentially the purpose of the buy sell agreement is to provide support in a business partnership transfer/acquisition that is unexpectedly necessary due to a partner’s sudden departure due to disability or death.
Essentially when a business partner needs to exit a business the business owner who wishes to remain needs to have funds to purchase their portion of the company. Typically there isn’t a large sum of money sitting around waiting to purchase half of a business. A buy sell agreement can be set up ahead of time to protect either business owner.
Types Of Buy Sell Agreements
There are two typical buy sell agreements:
- Cross Purchase Buy Sell Agreement: In a cross purchase plan, each of the existing business owners purchase life insurance plans from the other owners. This allows for each business owner to manage the coverage of the other owners. When an owner suddenly dies each owner that has a life insurance policy for that owner will use the insurance to pay for the deceased owner’s share of the company. This agreement is typically utilized if some of the business owners do not want to purchase life insurance for a co-owner.
- Entity Buy Sell Agreement: The entity buy sell agreement is typically purchased by the company as a whole on each of the business owners. This approach is utilized by businesses and business owners that are in agreement and unified over the necessity of a life insurance policy for the owners. Because the business is paying for the life insurance policy, the business as a whole is a beneficiary.
When comparing the two it is easiest if you only view who is the beneficiary and who is paying for the coverage. In the cross purchase, the business owners are purchasing the life insurance coverage so naturally, they are the beneficiaries. If the company is paying for the life insurance policy, as explained in the entity purchase plan, the company receives the life insurance payout.
Difference Between Key Person & Buy Sell Agreement
Key person insurance is essentially insurance on a person that is integral for the function of your business. If you were to lose a key person for any unexpected reason, the insurance on them would help cover the potential funds lost for the timeframe it takes to replace or train someone in their position.
In contrast, the buy sell agreement life insurance policy is tied to the ownership of the business. The partner of a business has ownership over a portion of the company. In their absence or death that ownership is then transferred to their spouse or children. In most scenarios, the family members who inherit a stake in a business do not have an interest in continuing with the company. A sum of money to buy out their ownership in the business is needed.
You can have both key person insurance and a buy sell agreement in place for a business owner. We would recommend this. While you may be burdened with the cost of paying for their portion of ownership in the business, you will also be burdened with replacing them and their role within your company.
If your business partner were to suddenly die, all of these financial burdens, as well as additional responsibilities, could easily lead to your business collapsing. Don’t let your company fall apart due to the unexpected.
Steps To Setting Up A Buy Sell Agreement For Your Business?
Knowing the value and importance of having a buy sell agreement in place for your business is probably making you want to get one for your company. Whether your business partners live extremely risky lives or they are getting older you should have your business prepared. Below are the steps to getting your business set up with a buy sell agreement.
1. Talk To All Of The Business Owners
Start an open conversation with your business partners about the importance of the company’s future and how a life insurance plan will make the financial burden on a company manageable. Based on your co-owners response to the idea of life insurance you can determine if you want to pursue a cross purchase or entity life insurance plan.
2. Once Discussed Contact An Insurance Company
Strickler Insurance provides a wide range of business insurance. We will take the time to inform and educate your business owners on the types of Buy Sell agreements and which is most effective for your company.
3. Decide & Act
Discuss internally which type of Buy Sell Agreement your company would like to move forward with. Once that is voted on and determined, get your company set up with a Buy Sell Agreement to guarantee its future health, growth, and success.
4. Purchase Your Buy Sell Agreement
Pay for your buy sell agreement just like a life insurance policy. When the time comes for your company to use the coverage you will be thankful you set your business up with an effective life insurance policy.
Set Up A Buy Sell Agreement For Your Company
Get a free insurance quote on a buy sell agreement and make sure your business is prepared for the unexpected. Learn more from our highly skilled insurance professionals when you contact us. At Strickler Insurance we want to help your business to succeed and grow with the appropriate protection.
