If you own or are planning on starting a business, you should consider a Buy/Sell Agreement backed with life insurance. A business owner’s death, or disability can ruin a business, wrecking years of hard work in addition to the financial security of the owner’s family and business partners.
Buy/Sell Agreements handle:
A thoughtfully designed buy/sell agreement will address many of these questions and increase the likelihood your business will continue. It will also financially take care of the owner’s family and business partners.
Your lawyer will help with the specifics of your buy/sell agreement, however we can help with fullfilling the insurance requirements of the agreement.
There are two main ways of insuring a buy/sell agreement, Cross-Purchase Plan and Entity Purchase/Stock Redemption Plan.
A cross-purchase plan is designed with each owner purchasing life insurance on the other owners. When one of the owners dies, the remaining owners use the life insurance proceeds to purchase the deceased owners equity in the business.
This type of plan can get unwieldy as the number of partners increase. It can also have unequal premiums paid by each partner since a young partner will have to pay higher rates on older partners.
An entity purchase plan is designed with each employee agreeing to sell his or her equity back to the business.
To fund the buyback the company purchases life insurance policies on each of the company’s owners. The company typically pays all the premiums and is the owner of the policies. When one of the owners dies, the life insurance proceeds are paid to the company and used to purchase the deceased owners stake from the deceased owner’s estate.
An entity purchase plan is a more manageable solution if you have many partners in a business. It is also more centrally controlled by the company.
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