Funding a Buy Sell Agreement with Life Insurance

by Jeff Rose on November 22, 2016 · 0 comments

Funding a Buy Sell Agreement with Life InsuranceIf you are entering into a partnership, you need to plan ahead for the future and the unexpected.

As your business starts to grow and you increase your market share, it looks like everything is on the right track. You’ve worked hard to build your business and make it as successful as possible. All of those hours, sweat, and sacrifices that you’ve made

But if something were to happen to you or your partner, it could leave the burden of operating your business or trying to sell the business on your family’s, your partner’s or your shoulders.  Having this added burden can be too much for business partners or families that are going through a difficult time of losing someone close to them

This is why smart co-owners will set up buy-sell agreements and fund them with life insurance.  These agreements are just as important as a personal liability policy, and are designed to ensure a smooth transition of ownership when business ownership needs to transferred because of the loss of an owner.

Read on and learn more about buy-sell agreements and how life insurance can be the right financial vehicle to fund this agreement.

What is a Buy-Sell Agreement and Why Do You Need One?

When you are in the process of drawing up your contracts with your business partner, one of the many different situations that you need to plan for is if you or your partner pass away. Both you and your partner contribute to your business with your own unique skills. You may be a master at marketing and your partner might handle all of the meetings with prospective clients.

But if one of you are gone, you are left dealing with everything and these is a strong chance that the loss can quickly lead to financial turmoil. Buy-sell agreements prevent all of this from happening by planning for how the business will be handled in these types of situations.

You never know what’s going to happen in the future, and you should always be prepared for the worst. While have life insurance is a great way to do that, that’s only a portion of the protection that you need.

 

Types of Buy-Sell Agreements That You Can Implement

There are two different types of plans that you can implement when you are drawing up a buy-sell agreement. Here is a brief description of each plan so that you can decide which is best for you and your partner:

  • The Stock Redemption Plan – With this plan, each owner will enter into an agreement with the business. The owner agrees to to sell their perspective interests of the business to the business rather than passing their ownership onto their family members or their heirs. The business will buy life insurance, the funding vehicle, and pay the premiums. The members will receive the proceeds from the sale.
  • The Cross-Purchase Plan – When there are two or three business owners, the cross-purchase plan may be ideal. With this plan, each business owner purchases affordable life insurance on the other owners and own the life insurance plans. If one of the owners were to die, the surviving owner would be the beneficiary and use the fund to buy-out the owner that passed away.  This work very similar to a normal insurance policy that you would have on a spouse or loved ones. If they pass away, you get the payout, but in this case, the money is used to buy the rest of the business and help recover from the loss of a business partner.

Why is Life Insurance the Best Way to Fund a Buy-Sell Agreement?

Whenever life insurance is used to funded buy-sell agreement, either other business owners or the business buys the insurance. No partners buy insurance on themselves. This gives everyone peace of mind that they will receive the benefits they need to know that the business can remain in operation. Here are some of the many benefits of using life insurance as your funding choice:

  • Income tax-free: As a business owner your know how much money the government can take when you are in a higher tax bracket. The proceeds that beneficiaries receive from a life insurance policy are income tax-free. This means that the entire face value can be used to purchase business interest.
  • Cash: Life insurance is paid in full in one lump sum. This means that the business does not have to wait to receive small payments of the benefits.
  • Quick Payment: In most cases, life insurance is paid out quickly to beneficiaries. This means that the buy-sell agreement can be settled much faster.
  • Permanent Life Insurance: Permanent life products will build cash values that can be used when a partner is disabled or retires.

It is very important to fully fund your buy-sell agreement. For some partners, the only way to fully fund the agreement is with life insurance. Having a fully funded agreement ensures that your share of the business will be paid for in full so that your family gets the cash they need instead of worrying about dealing with everything behind the scenes.

It’s vital that you and your business partners have everything specifically laid out and agreed upon, just in case you ever run into one of these tragic circumstances. It’s better to prepare for it now than trying to scramble later.

One of the best ways to get life insurance for a buy-sell agreement is to work through an independent agent. There are so many different factors that you have to consider, and it can be confusing trying to find the perfect policy to fit your business’ needs. Unlike traditional insurance agents, our independent agents work with many of the best life insurance companies you can work with across the United States. There are several advantages to working with an independent agent.

The first is that they will save you money. It allows you to compare dozens of quotes from different companies at once. Just like you would compare prices of a new appliance or vehicle, you should also compare rates from insurance companies for your policy. Every insurance company is different, and all of them are going to have different rating systems for their applicants, which means that you could get drastically different rates for the same coverage.

Working with our agents will also save you time during the life insurance process. Instead of having to call all of the companies yourself, we bring all of the lowest quotes directly to you. Don’t waste hours on the phone with different agents. Let us do all of the hard work for you. Additionally, we can make the application process much quicker by walking you through it and helping you get coverage quickly.

If you have any questions about life insurance for a buy-sell agreement, or about life insurance in general, please contact us today. We would be happy to answer those questions and provide you with quality coverage at an affordable price. We know that buying life insurance isn’t easy. It can be a long and time-consuming process, but it doesn’t have to be.

You never know what tomorrow is going to throw at you. While you can’t predict the future, you can always protect yourselves from the worst. If anything tragic were to happen to you or your business partner, it could cause all kinds of problems that could ruin your organization. Having a buy-sell agreement, and an insurance policy to accompany is a great way to ensure the protection of you family.

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