Buy-Sell Agreements Funded Using Life Insurance

Concept Description

With a buy-sell, either the business itself, the surviving owners or a key employee can purchase a deceased owner’s share of the business at a previously agreed upon price – and the deceased owner’s estate is obligated to sell for that price.
•Owners of small, closely held businesses
•Owners of sole proprietorships and partnerships
•Business owners who hold at least 10 percent of the business
•Business owners who have very little personal assets outside of their business assets

How it Works

There are three primary ways to structure a buy-sell agreement that is funded with life insurance.
•With a cross-purchase buy-sell, each participating business owner purchases a life insurance policy on the other owners’ lives. Each person owns, pays the premiums for and is the beneficiary of the respective policies. At the death of a business owner, the other owners use the life insurance proceeds to purchase the deceased owner’s share of the business.
•An entity buy-sell is generally used when there are several owners since fewer policies will be required. The business purchases a life insurance policy on each owner’s life. The business owns, pays the premiums for and is listed as the beneficiary of each policy. At the death of a business owner, the business uses the life insurance proceeds to purchase the deceased owner’s share of the business.
•With a wait and see buy-sell, the specific purchaser of the deceased business owner’s share remains unknown until death occurs. Like a cross-purchase agreement, each participating business owner owns, pays the premiums for and is the beneficiary of the respective policies. The business entity has the first opportunity to purchase the deceased owner’s shares and if it chooses not to, the other owners may purchase the interest. If the other owners choose not to buy, then the business entity is required to complete the purchase. If this happens, generally, the owners will contribute the life insurance proceeds to the business in order to fund the business redemption plan.