Life Insurance for Buy Sell Agreements
A “Buy Sell Agreement” is an agreement under which one party in a business agrees to buy another party’s ownership interest in the business at death. Buy sell agreements usually occur between partners, but may be established between investors, shareholders and may also be used by key employees who wish to purchase the business they work for in the event of an owner’s death.
For more information on life insurance for buy-sell agreements, please contact our office:
Phone: 513-891-9888
Email: tracy@mccarthystevenot.com
- Buy sell agreements are usually funded with life insurance.
- If two partners own a business and set up a buy sell agreement, each partner buys and owns life insurance on the other partner.
- When one partner dies, proceeds from the life insurance policy are paid to the surviving partner and used by that partner to buy the deceased partner’s interest in the company.
- Life insurance proceeds are be paid tax-free to the surviving partner provided the policy premiums were paid with after tax dollars.
- The deceased partner’s beneficiaries will receive the proceeds as a buyout, but those proceeds will be taxable.
It is important to work with an attorney to draw up a document that sets the guidelines for a buy sell agreement. Copies should be signed by all parties and each party should retain a copy of the agreement. When the agreement is first established, the company will have a stated value that establishes the amount of life insurance needed to execute the agreement. Because a business’ value can change over time, regular reviews are a good idea. During life insurance underwriting for a buy sell agreement, the insurer will want to see the company’s financial information to evaluate insurable interest and to assess whether the amount of life insurance being purchased is warranted.
Other Examples of Buy Sell Agreements
Example 1: Three people are shareholders in a closely held (non-public) company and wish to set up a buy sell agreement. Each shareholder takes out a life insurance policy on the life of the other two shareholders. A total of six life insurance policies are ultimately purchased. When one shareholder dies, proceeds are paid to the remaining two shareholders. These funds are used by the surviving two shareholders to buy out the interest of the deceased shareholder.
Example 2: A key employee works at a company that is owned by a retired sole proprietor. The key employee is responsible for a majority of the company’s business. A buy sell agreement is set up in which the key employee owns life insurance on the life of the business owner. When the owner dies, proceeds are paid to the key employee. The key employee uses those proceeds to buy the business from the heirs and /or the estate of the deceased sole proprietor.
Funding A Buy Sell Agreement
Life insurance is usually the least expensive way to fund a buy sell agreement. Because buy sell agreements are established in such diverse circumstances and sometimes deal with long term business succession issues, either permanent life insurance or term life insurance may be appropriate.
