In a partnership or closely held corporation, what happens if one owner dies, becomes disabled, or wants to exit the business? Without a solid plan, things can get messy—quickly.
That’s where a buy sell arrangement insurance backed by insurance comes in. It’s a legally binding contract that outlines how ownership will be transferred if a triggering event occurs, and the insurance ensures there’s money to make it happen.
What is a Buy-Sell Agreement?
A Buy-Sell Agreement is a legal document that outlines what will happen to an owner’s share of the business if they:
- Die
- Become disabled
- Retire
- Decide to sell their interest
This agreement can prevent internal conflict, protect the company’s financial health, and ensure a smooth ownership transition.
Why Use Insurance for a Buy-Sell Agreement?
The biggest challenge in executing a buy-sell agreement is funding it. That’s where Buy-Sell Insurance comes in—typically life insurance and/or disability insurance taken out on the business owners.
When one of the owners dies or becomes disabled:
- The insurance pays out.
- The surviving owners use the funds to buy out the departing owner’s share.
- The departing owner (or their family) receives fair compensation.
Benefits:
- Guarantees liquidity for a buyout
- Keeps business ownership within the company
- Avoids the need to take on debt or sell company assets
- Ensures a fair valuation of the business
Types of Buy-Sell Arrangement Insurance
1. Life Insurance Funded Buy-Sell
- Each owner is insured.
- On death, the death benefit provides cash to buy the deceased’s shares.
Two common structures:
- Cross-purchase agreement: Each owner buys a policy on the others.
- Entity-purchase agreement: The business buys the policy and buys back the shares.
2. Disability Buy-Sell Insurance
- Provides funds if an owner becomes disabled and can’t return to work.
- Usually includes a waiting period (e.g., 12–24 months).
- Payouts can be a lump sum or structured payments.
How to Set Up a Buy-Sell Insurance Plan
- Create or review your buy-sell agreement with a lawyer.
- Decide on the structure (cross-purchase vs. entity-purchase).
- Work with a licensed insurance advisor to determine:
- Policy type (term or permanent)
- Coverage amount
- Premium split
- Draft ownership and beneficiary designations based on the chosen structure.
- Review the agreement annually and adjust coverage as the business grows.
Tax Considerations
- Life insurance proceeds are generally income tax-free to the beneficiary.
- Premiums are not tax-deductible in most cases.
- The structure of your agreement affects capital gains, basis step-ups, and more—always consult a CPA or tax attorney.
Final Thoughts
Buy-Sell Arrangement Insurance gives peace of mind and a plan of action in case the unexpected happens. It protects the business, the owners, and their families.
If you're a business owner or partner, and you haven’t set up a buy-sell plan funded by insurance, now’s the time to act.
Comments