7 Reasons to Use Life Insurance to Fund a Buy-Sell Agreement

7 Reasons to Use Life Insurance to Fund a Buy-Sell Agreement

Buy-Sell Agreements

Buy-sell agreements are complex legal documents that require the help of an attorney. But when it comes to funding a buy-sell agreement, life insurance as a funding vehicle can simplify the agreement’s administration while also offering other benefits to the company and the insured person’s estate.

Small business owners should set up a properly funded buy-sell agreement that provides for the company’s purchase and sale in the event of one owner’s death, disability or another triggering event. The agreement establishes “who” will purchase the affected owner’s interest after a triggering event. This could be a business entity, a surviving owner or a key employee. It also establishes an agreed-upon price for the purchase. When the triggering event happens, the owner, if alive, or the owner’s estate has an obligation to sell the business interest at the agreed-upon price.

Fully Fund Buy-Sell Agreements to Protect Heirs & Surviving Owners

When owners agree to a buy-sell arrangement, providing proper funding can help financially protect the decedents’ heirs and any surviving owners.
Without full funding in place, heirs have to rely on the continued success of the business so they can receive the purchase price in installments over time. During this delay, surviving owners and the decedent’s estate could encounter unforeseen legal and financial problems. For example, if the business owner’s death, and consequently the cost of his or her replacement, affects earnings, the company or the surviving owner may find it impossible to pay installments or borrow money to cover the purchase price.

You can avoid these challenges by fully funding a buy-sell agreement at its inception. One way to do this is with life insurance policies.

Choose Life Insurance As a Funding Vehicle for Buy-Sell Agreements

Here are seven reasons why life insurance may be a good funding vehicle for your buy-sell agreement. As with any life insurance, your needs will change as your personal situation changes, so consult regularly with a financial professional to make sure you have the coverage you need.

  1. Life insurance benefits get paid at the time of a triggering event, such as death. This makes funding available to the policyholder, whether it’s the company or a surviving owner, so they can make a timely purchase of the business interest.
  2. Helps to provide for the purchase of the business interest for the premiums paid on the policy
  3. Availability of sufficient life insurance helps the business avoid an adverse impact on working capital and it helps to protect the credit position of the business.
  4. Life insurance provides a rate of return. This is reassuring because you will need funding within a short period of time following execution of the buy-sell agreement.
  5. As a funding vehicle, life insurance is easy to administer. All you need to do is pay the premium.
  6. Life insurance owned by the company won’t interfere with settlement of the decedent’s estate.
  7. Provides immediate cash for estate tax payments by changing a “hard” asset to a liquid asset.

For more information about the option of using life insurance to fund a buy-sell agreement, talk to a financial professional.

Note: Provided content is for overview and informational purposes only and is not intended as tax, legal, fiduciary, or investment advice. Life insurance should be purchased by individuals that have a need to provide a death benefit to protect others with insurable interests in their lives against financial loss.  Life insurance is not a retirement plan, investment, or savings account.  Life insurance policies’ cash values are not considered liquid.

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