What would happen to your company if you or one of your business partners were to die prematurely? Business owners should have a plan to help protect the interests of their surviving partners, as well as the financial health of the company. And life insurance from AAA Life Insurance Company can play a key role in that plan. How can life insurance help protect your business? A buy-sell agreement can be arranged, allowing for the portion of the company owned by the deceased to be transferred to the surviving business owners. A life insurance policy is a common way to fund a buy-sell agreement.
How does a buy-sell agreement work?
Buy-sell agreements allow for a smooth business transition and minimize detrimental impact to the company. Most ofen, they are structured in one of two ways—entity purchase or cross purchase.
With an entity purchase, the company buys life insurance on each of the business partners. The company owns the insurance policies, makes the payments, and is the benefciary. In the event one of the business partners dies, the company uses the beneft from the life insurance policy to purchase the deceased partner’s share of the company from his or her heirs or estate.
In a cross purchase situation, each individual business owner purchases a life insurance policy on his or her partner(s). The business partner owns the life insurance policy, pays the premiums, and is the benefciary. Should one of the business partners pass away, the surviving owners agree to use the life insurance benefts to purchase the deceased owner’s business interest.
For businesses with multiple co-owners, a cross purchase arrangement means they would own several policies—one for each of their partners.
Advantages of a Buy-Sell Agreement
A buy-sell agreement funded with life insurance can:
- Help provide the funds necessary for business partners to buy their partner’s share of business
- Help ensure family members of the deceased business owner are fairly and promptly compensated for their share of the business
- Allow for a clean transition of ownership, avoiding disagreements over the value of the business
- Help reassure employees, customers, and suppliers by demonstrating stability
- Take the pressure of of surviving family members who may feel reluctant to step in as a business partner