Life insurance funded buy-sell agreement – An essential tool for business owners
As a business owner, you may have invested a large amount of time, money, and effort into building your business. However, have you considered what will happen to your business if you were to die unexpectedly? Who will take over your responsibilities? Who will inherit your share in the business?
A life insurance funded buy-sell agreement is an essential tool that every business owner should have in place. It is a legal agreement between business partners that outlines what happens to the business in the event of a partner`s death or disability.
The agreement is structured in such a way that when a partner dies or becomes disabled, the other partner(s) agrees to purchase the deceased or disabled partner`s share in the business. The purchase price is predetermined and is based on the value of the business at the time of the agreement.
The purchase price can be funded via life insurance policies on the lives of each partner. Each partner takes out a life insurance policy on the life of the other partner(s), with the policy proceeds being used to buy the deceased partner`s share in the business.
A life insurance funded buy-sell agreement ensures that the surviving partner(s) has the funds to purchase the deceased partner`s share in the business, thereby maintaining business continuity. It also provides financial security to the deceased partner`s family, who may not have been involved in the business.
There are two types of life insurance funded buy-sell agreements – cross-purchase and entity purchase. In a cross-purchase agreement, each partner purchases a life insurance policy on the life of the other partner(s). In an entity purchase agreement, the business itself purchases a life insurance policy on the life of each partner.
It is essential to review and update the life insurance funded buy-sell agreement periodically to ensure that it reflects any changes in the business and the partners` circumstances.
In conclusion, investing in a life insurance funded buy-sell agreement is crucial for every business owner. It provides financial security and ensures business continuity in the event of a partner`s untimely death or disability. Consult with a financial advisor or an attorney to determine the right type of agreement for your business.