Business partnerships are common but there is a concern about the business surviving the tide should one of the partners die or suffer a permanent disability. Typically, a successor is not the immediate solution to a surviving partner but it may be difficult not to have one if the business has to continue.
The remaining partner may choose to buy the ex-partner’s shares if funds would allow so. Funds may come from business asset liquidation but doing so could prove detrimental to the business or to the owners.
Protect a Business from a Partner’s Death or Disability through Buy/Sell Life Insurance
Business partners who enter into a business may opt to buy/sell life insurance agreement so that there could be an option for surviving partner to buy out shares of a disabled or deceased partner. Other events that could be covered by the agreement include:
– Permanent disability (from accident or injury)
– Voluntary retirement
A Buy/Sell Life Insurance Agreement involves the following main inclusions:
- Guarantee of Shares Purchase
In a buy/sell agreement, events that could cause shares to be purchased by surviving partner are mentioned so that the option to purchase the ill or deceased partner’s shares is guaranteed.
Person to Purchase Shares
The agreement will also specify who can buy the shares of the departing owner, binding that partner to buy the shares or have the company affect a shares buyout.
Business Interest Valuation
Valuation of shares of the departing owner is a buy/sell agreement’s main feature where the interest is commonly valued according to the market’s rate at time of the event.
Owners’ shares are reviewed and recalculated at least once a year to keep up with regular valuation adjustments over the years.
Funding a Buyout
The typical funding of shares buyout is through the life insurance policies on the owner’s lives which typically covers trauma and permanent disability.
Two types of Buy/Sell Life Insurance Agreements to Safeguard Businesses
- Cross-purchase Agreement
This allows one life insurance policy for each shareholder in the business. Should one owner die or become permanently disabled the policy’s proceeds will be used to purchase the departing owner’s business interest as the procedure allots enough funds for the remaining owners. They then can buy the shares of the departing owner.
The number of life insurance policies that an owner has to purchase on the other owners increases when there are several business owners.
With this type, business owners don’t own life insurance policies on one another but the company. In case of death or permanent disability of one owner, it is the company that purchases the shares from the life insurance policy benefits owned on the shareholders.
When there are multiple owners, instead of the owners buying policies on each other, the company buys one life insurance policy on each owner, making this type easier to establish. Should the company buy the shares of the departing owner, it does not follow that other owners’ shares in their own names also increase but each individual’s percentage of ownership goes higher.
Learn more how you can protect your business and your business partnership. Talk to one of our expert financial advisers about Buy/Sell Life Insurance Agreements.