Why Business Owners Should Fund Their Buy Sell Agreement with Life Insurance

While life insurance fills numerous needs in personal financial planning, it can also be an ideal vehicle for business planning as well. In fact, there are many uses for life insurance in a business – and having life insurance can even play a key role in the overall financial stability of the company itself.

For example, the proceeds from life insurance may be able to protect a company against the unexpected loss of a business owner or key employee, as well as keep a business running until either a replacement can be found or the company can be sold to a suitable buyer.

Because a company’s ownership may be set up in a variety of different ways, there are various life insurance techniques that can be put into place in order to provide protection. With this in mind, business owners should consider using life insurance as a key part of their planning process.

Using Buy Sell Agreements to Protect a Business Against the Unexpected

Just as in personal and family situations, if the owner of a business passes away unexpectedly, a company can be changed drastically if proper planning is not put into place. One way to protect a company from the unexpected loss of a business owner or key employee is to implement a buy sell agreement.

A buy sell agreement is a contract between two or more owners of a company. When there are two or more owners of a company, the sudden loss of one of them could essentially devastate the entire business. Therefore, the owners can set up a buy sell agreement where each of the owners purchases a life insurance policy on the others.

Should one of the business owners pass away, the proceeds from his or her life insurance policy will provide the needed funds for the surviving owner (or owners) to purchase the deceased business owner’s portion of the company. Such funds can essentially allow the company to survive and continue operating during this transaction.

In addition to helping the surviving business owners, a buy sell agreement can also provide benefits to a deceased business owner’s family or other loved ones who may have been dependent upon that owner – and that owner’s income from the business. In this case, the funds from the life insurance policy can provide these individuals with funds for the payment of final expenses, as well as with funds for income replacement.

Cross Purchase Agreements

One type of buy sell agreement that is oftentimes used with business owners is a cross purchase agreement. These agreements are typically used when there are two or three partners in a business.

With a cross purchase agreement, each of the partners will purchase a life insurance policy on each of the other partners. In this case, then, each of the partners is the named beneficiary of the policies that they purchase. In this instance, the company is not a participant in the cross purchase agreement. Rather, the partners each pay the premiums and have their beneficiary designations in proportion to each of their shares of the purchase price of the business that is set forth in the buy sell agreement.

The policies that are purchased in these agreements should be permanent life insurance as there are no time limits on the coverage with permanent life insurance. (Term life insurance policies only last for a certain length of time. Once the time limit runs out, the insured would need to re-qualify for coverage. If he or she had contracted an adverse health condition and was uninsurable at that time, the cross purchase agreement would be unable to continue).

It is important to note that when funding a cross purchase agreement with life insurance, the policies should ideally have an option in them to be able to increase the face amount of coverage over time. This is because the value of the business may increase in the future, and this will help to keep the face amount of the policy in line with the current value of the company.

How to Purchase Life Insurance for a Buy Sell Agreement

There are many ways to purchase life insurance for both personal and business reasons. Before doing so, however, it is important to research policies and premiums in order to determine what will work best for your specific situation and needs.

In doing so, we can help. We work with many of the best life insurance companies in the market today, and we can help you to compare the coverage that will work best for your business buy sell agreement. In order to get the process started, just Click Here.

Should you have any questions, please feel free to contact us toll-free at 864-491-5785 and we will be happy to walk you through any concerns that you may have regarding life insurance, quotes, or the application process.

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