A Buy-Sell Agreement;
May Be Your Best Business Decision YET!
A buy-sell agreement using a life insurance policy as a tool; may just be your best idea yet!
Let me explain…
If you are in business with a “co-owner” or partner and are sharing the costs of this business, have you considered what may happen if;
- unexpected death
- retirement
- disability
- voluntary separation
Would you have the capital to “buy out” your partner? Also consider if you are retiring, would you be able to sell your portion of the business to your co-owner? Is there enough money in savings?
Maybe not!
This is where a buy-sell agreement using a life insurance policy may be your best choice.
Having a buy-sell agreement with a life insurance policy is VERY common!
Why a life insurance policy is the best vehicle
Typically you would take out a TERM life insurance policy vs a PERMANENT life policy for these reasons:
- more affordable; premiums on a term policy are less expensive
- often only need coverage for a set amount of time, often for 5-20 years
- beneficiary becomes you or your business partner or the business itself. Provides money for purchase or trade value, for an orderly transfer.
- These policies can also provide money to pay out heirs or to cover estate debt, expenses and taxes in the event of a death.
Sounds like what you need?
Types of buy-sell agreements
- Cross purchase plan; this is when each business owner takes out a life insurance policy on each other. In the event of an owners death the remainder owners use the benefit to purchase that owners share of the business. This may be a payout to family or spouses wife/husband/kids who inherit these shares from the estate. Think about it, if you are in business and your partner dies, is it feasible that their family can continue to support your business? Often NO. This helps protect your financial interests.
- Stock redemption plan or entity purchase. This is when you have an employee-owners or stock holders of your business. A life insurance policy is taken out on all the owners and in the event of death/disability the policy pays out directly to the business. The business pays the premiums in this type of situation. The business can use the death benefit to buy out the shares of the deceased/disabled owner.
Example/case study
Tom and Steve decide to go into business together to start up their own IT consulting firm. They each put in $250,000 for their start up costs.
This new business, lets call it…. ” T&S IT Consultants,” is dependent on both Tom and Steves hard work and expertise.
In order to help protect their mutual investments they each take out a life insurance policy on each other for $2.5 million. This $2.5 million is based on their personal investment of $250,000 x 10 years. This should be an adequate amount in the event of one of their deaths/disability to either cover the costs of the business till a replacement can be found, or to buy out their portion of the business from heirs to his estate.
See, these types of agreements help protect your business investments!
It allows you options, and time to help adjust your business plan after a big loss.
Above all, these policies are affordable and offer a huge peace of mind.