Buy-Sell agreements generally are one of the most common, efficient, and important tools in setting the framework for an ownership transfer to their partners, heirs, etc.
In the most simplistic layman’s terms, a buy-sell agreement1 with life insurance is a contract based around life insurance policies purchased on each owner to help ensure the smooth continuation of a business after the death of one or more of the owners. (It can also be referred to as Cross-Purchase Plan). The agreement creates rules for what will happen when a business owner passes away. Basically saying something to the effect that if one of the owners passes away, a life insurance policy kicks in by paying a lump sum cash death benefit to buy out the ownership interest of whoever would have inherited that share of the business.
For example: If one of the owners passed away, and their surviving spouse or child had inherited a portion of the business, that may not be good for the actual business or for the surviving family members since the family members may not know how to run the business nor have the desire to learn. By having a buy-sell agreement with life insurance set up in advance, it takes away that complication. It allows the business to be run by the surviving owner(s) and terms would have been set up in advance by the then deceased owner for the surviving family members to receive a predetermined lump sum of cash from a life insurance death benefit which in turn buys out their ownership interests in exchange.
Why is it important?
A buy-sell agreement is kind of like a will for a business and it can eliminate a lot difficulties and heartaches when an owner passes away. A plan needs to be in place in advance. Life insurance as a method of funding that plan is a great way to accomplish that funding portion of the plan.
These type of agreements can often be settled expeditiously allowing for lump sum cash proceeds to be paid to the surviving family quickly, which can be very important to the surviving family members as well as continuity and a smooth transition for the business itself.
Another benefit to the survivors is that generally life insurance proceeds are income tax free. (Depending on individual situations.)
1 Note: Some buy-sell agreements can also be set up to be used due to an owners' disability, or if an owner is otherwise forced to leave the business and possibly even other situations such as retirement, etc. But for the purpose of this blog post, I am only referring to a buy-sell agreement with life insurance set up in advance for the potentially disruptive and unfortunate event such as if one of the owners actually passes away.
Note: Life Insurance information can be confusing to many people. As an "independent licensed agent" I can explain things to you in simple terms so you feel comfortable making a decision. Then I can help you choose a life insurance policy, from many choices of different insurance companies, that you feel fits your needs. Plus if you choose to work with me you will have personalized service by a local agent that can shop premium quotes for you. If you would like my assistance to discuss and/or start the process of getting you insured please call me at 941-404-5334.
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