One solution to consider is a buy-sell agreement funded with life insurance. In this scenario, the life insurance will provide a sum of money at your death that can be used to pay your family or your estate for your ownership interest in your company.
If you choose to fund your buy-sell agreement with life insurance, either your business or the other co-owners of your company would take out life insurance policies on each other (not on themselves). In the event that you were to die, the policy owners (meaning either the company or the co-owners) would receive your death benefits from the life insurance policy, and these funds would then be paid to your surviving family members for your ownership interest in the company.
Here are several advantages to using life insurance to fund your buy-sell agreement:
- Life insurance will provide a lump sum of cash at your death that are usually paid quickly.
- Unless your organization is a C corporation, the proceeds from life insurance funds are typically tax free.
- Assuming that sufficient cash values have built up in your life insurance policy over the years, this money can be used to purchase your ownership interest in your business once you're gone.
There are, of course, a few downsides to funding your buy-sell agreement with life insurance:
- Typically, life insurance premiums are paid with after-tax dollars.
- Paying the life insurance premiums is an ongoing expense.
- Age or illness could prevent some partners from qualifying for a life insurance policy or create higher premiums.
- If there is a varying range in the ownership interest of business partners, more life insurance may be required for those owners with larger interests.
There are 3 basic ways that a buy-sell agreement could be funded with life insurance.
The first option is an entity purchase buy-sell agreement, which is where the company buys life insurance policies for each partner involved in the business. In this scenario, the annual premiums for the life insurance policies are paid by the business.
The second option is a cross purchase buy-sell agreement, where each owner of the company buys life insurance policies on each of the other owners. Each co-owner will typically be responsible for individually paying for the premiums on each of these policies and are therefore the beneficiary of these policies.
Finally, the third option is a hybrid buy-sell agreement that blends features from both the entity purchase and cross purchase buy-sell agreements.
Every business is different, as are the needs of it’s owners and partners. It may be important to conduct a business valuation, and in the very least work through a knowledgable consultant offering customizable solutions.
At Summerlin-Roberts, our experience and industry resources allow us to truly listen to our clients' needs and offer a custom solution to help them meet their objectives. Please contact us to learn more about funding a buy-sell agreement with life insurance and if this solution would be the right fit for your business.