You have likely spent years of your life building your business. It would be best to protect your business with several types of insurance, but many business owners choose to put a buy/sell plan to protect against the unexpected. These plans are a binding agreement between business owners that lays out what will occur if an owner or partner should suddenly pass away. Without a buy/sell agreement, the asset of the shares of the business could give to the spouse. There are three things to consider when you purchase buy/sell protection insurance:
You Can Use Life Insurance to Fund Your Buy/Sell Agreement
To safeguard your business, you need to ensure that the company can smoothly transition to the next phase at the death of an owner or partner. A buy/sell agreement is a contract that specifies how the interests of a deceased or incapacitated owner or partner will be handled. These agreements are often funded with buy/sell protection insurance, purchased by the company, which covers the cost of buying the deceased person’s interests in the enterprise. This is one of the most practical ways to ensure the company survives the transition and has the time and financial support necessary to find and train a replacement and the income the business needs due to any potential loss of revenue.
You Can Choose Two Types of Buy/Sell Agreements
Both types of agreements can be funded with buy/sell protection insurance, are as follows:
- Cross-Purchase Agreement: These agreements allow the key employees to purchase the ownership interest of a key employee or owner.
- Stock-Redemption Agreement: These are formal agreements among critical employees and the business in which the company agrees to purchase the interest of key employees or owners of the enterprise.
You Can Avoid Borrowing or Using Company Funds to Buy Out Business Interests
You have several options to resolve buying out company interests when an owner passes away or is disabled and unable to work. You can set aside funds, but this can be challenging, as the value of the shares may be more than what you have set aside. You can borrow funds to purchase the shares, but this can add financial stress to a business already going through a difficult transition. The best way, and easiest, is to purchase Buy/Sell Protection Insurance.
The business itself purchases this insurance. At the death of an owner or partner, the policy limits should be adequate to buy the shares at a fair price and provide funding for the company during the transition. A business insurance agent can meet with you to discuss Buy/Sell Protection Insurance. The cost of the policy will reflect various factors, such as the age and health of the insured person. It stands to reason that purchasing a policy as early as possible can be wise since it’s impossible to be aware of all that life could bring. The sudden death of a partner or owner can be a financial disaster without one of these business insurance policies in place.