Why Do I Need Buy/Sell Insurance?

 

The death of an owner or partner of a business can cause immediate hardships and acute financial problems for the surviving owners. Buy/Sell Agreements are often used by members of a partnership, or by stockholders in closely-held corporations, to provide the funding that will enable the remaining owners to buy the deceased's portion of the business.

 

There are two key steps involved in establishing Buy/Sell protection. The first is a formal agreement among the business owners as to how to dispose of or continue with the business, following the death of an owner. The second step is to arrange the funding that will guarantee that the Buy/Sell Agreement is promptly executed.

 

Advantages of Buy/Sell Agreements

• A Buy/Sell Agreement can guarantee a buyer for an asset, which may not pay regular income to one's heirs.
   

• Under certain circumstances, a Buy/Sell Agreement can establish a value for federal estate purposes, which is binding with respect to the Internal Revenue Service.
   

• A Buy/Sell Agreement can spell out the terms of payment, which can be funded by the purchase of a life insurance policy. This type of agreement can provide a smooth transition of complete control and ownership to those who are going to keep the business going.

 

Methods of Funding the Buy/Sell Agreement

 

Life insurance is a simple and cost-effective way to ensure timely funding of a Buy/Sell Agreement. Insurance usually offers a better funding vehicle as opposed to relying on the personal funds of the surviving owners; or trying to set up a sinking fund inside the business which, in the case of a corporation, could lead to an accumulated earnings tax problem. Borrowing the money may not be a good option at a time when the business is already under stress. Offering installment payments to the heirs of the deceased may be undesirable, because the payments may create a burden for the business.

 

There are several key advantages in utilizing life insurance to fund a Buy/Sell Agreement:
 

• Complete financing is guaranteed from the beginning.

• Death benefits are generally free from federal income tax.

• Cash values can be used in a buyout due to retirement or disability.

• It may be the most economical funding method when viewed in terms of discounted dollars.

• The company's credit position is strengthened.
   

A Buy/Sell Agreement funded by life insurance offers a simple solution for the current owners of any business to be assured full protection from the risks they would face upon the death of an owner.