Within a closely held corporation, business owners need to consider about what might happen if one of the owners dies. Partnerships are automatically dissolved with the death of one partner. It is important to select an insurance that assures a smooth transition of ownership and protects the family’s financial future. Therefore, a buy-sell agreement is very important.
Understanding Buy-Sell Agreement
A buy-sell agreement, or buy-sell insurance or business partner insurance, is a contract among business partners. At the loss of a partner, the business interest is transferred according to the terms of this business partner contract. The other owner(s) are obligated to purchase the deceased’s business interest and the deceased’s heirs are obligated to sell. A buy-sell agreement insurance can create a market for the stock, set a predetermined price at which owners agree to buy-sell their shares, and provide money to fund the life plan.
When owners create a buy-sell agreement, business partners or the corporate entity can take out a buy-sell life insurance policy that stands ready to provide the necessary funds to facilitate a buyout of that share of the company ownership. A reasonable price is fixed at the time the agreement is prepared. It is much wiser to do an insurance buy-sell agreement while structuring a new business, or if not, a lawyer can help in setting up a buy-sell life insurance at any stage of the company’s development. A similar life insurance can even be created based on disability insurance to be implemented in case of a business partner’s disability as opposed to death.
Two Types of Business Partner Insurance
There are two basic types of buy-sell agreement: cross purchase plan and stock redemption plan. With a cross-purchase agreement, each owner of the corporation purchases a life insurance policy on the other shareholders. The purchaser is both owner and beneficiary of the policies. Upon the death of a shareholder, the other shareholders are then able to use the life insurance proceeds to purchase the deceased owner’s shares.
Another commonly used type of agreement is a stock redemption agreement, in which the corporation owns policies on the life of the shareholders. When a shareholder dies, the corporation buys the deceased shareholder’s interest in the company with the insurance proceeds.