Business insurance 

Buy-Sell Agreement

Business insurance : buy-sell 

Buy-sell agreement funded with life insurance Protect and extend the life of your business From modest family operations to multi-billion dollar corporations, the death of an owner can seriously cripple a business. A buy-sell agreement allows for a smoother transition in ownership to the surviving owners. 

Heirs

Without a buy-sell agreement, the heirs of a deceased owner will inherit that owner’s shares of the company, yet they may not want to be a part of the business. A buy-sell agreement provides a buyer for their inherited business interest, freeing them from the burden of taking on a role as an owner. This also protects the business from shares being sold to someone outside the current ownership. 

Surviving business owners 

The surviving owners need to have funds available to buy shares from the heirs. Borrowing funds at expensive interest rates, liquidating business assets or using personal property as collateral to fund the purchase all have risk and negative impacts 

A life insurance solution Life insurance is a cost-efficient and relatively simple way to fund a buy-sell agreement. Funding through life insurance is potentially guaranteed and is also generally tax free 

Also useful in retirement - If a properly-funded cash value life insurance policy is used to fund the buy-sell agreement, the policy’s potential cash value could be used to help buy out a retiring owner. 

How it works 

Case study 

Problem 

Your are partners in a dental practice and have recently started working on succession planning. There is concern about where the funds will come from to buy-out the other partner’s shares if one of them were to pass away 

A solution 

A buy-sell agreement funded with life insurance can help one owner buy the other owner’s share should either partner pass away. Their attorney drafts a buy-sell agreement. Your clients agree to purchase the other’s interest in the business, purchase life insurance policies on one another, and make themselves the beneficiary on the other owner’s life. The total amount of coverage on each owner is the value of each individual’s ownership in the business. In order to provide maximum flexibility, each partner names the other partner as the contingent owner of the policies they’ve purchased. 

Benefits for business owners: 

- Establishes an agreed-upon method for determining business valuation 

- Helps avoid unintended or unwelcome transfers of ownership 

- Prevent heirs being stuck with an inheritance they can’t use

 - Have funds to transfer ownership of the business without probate

 - Protects the business from shares being sold to someone outside current ownership

 - Funding through life insurance is potentially guaranteed and offers a generally tax-free death benefit 


Hypothetical case study 

Dental Practice Value: $1M 

Client A: age 50

 Owns a $500,000 15-yearTerm policy on partner (Male, Age 32, Preferred Non-Tobacco) 

• Annual premium: $250 


Client B: age 32

 Owns two policies on partner (Male, Age 50, Preferred Non-Tobacco)

 Policies           Death Benefit  Annual Premium

15-year term   $250,000                $460

IUL                     $250,000            $20,795.46