Buy-Sell Agreement Funding

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When one of the owners of a corporation dies, questions arise quickly. Will the deceased owners family introduce complications into the corporation? Will the surviving owners have the equity available to redeem the late owner’s interest? Corporate owners are best served by entering into a buy-sell agreement, before these questions become immediate problems.

One of the most common buy/sell agreements used in a business continuation plan is a cross-purchase agreement.  This type of agreement allows the partners or shareholders to purchase the deceased owners share in the company.  The easiest way to fund a cross-purchase agreement is to utilize whole life or term life insurance.

When choosing between whole life insurance and term insurance coverage, the pros and cons of cost must be weighed according to the company’s present and future financial standing.  Premiums for term life insurance increase throughout the coverage period, whereas premiums for whole life are level throughout the coverage period.

When considering whole life insurance remember if it is held for a significant number of years, it will build up cash values that can be used for pension benefits, funding owner buyouts and can also be used to help the company’s liquidity ratio to secure advantageous loan terms. The cost of term life may be much greater than whole life if an individual exceeds the life expectancy used for underwriting the whole life insurance policies.

Term insurance helps out immediately by saving on premiums, thus, this savings can be reinvested in the company to reduce debt or it can be used to purchase more inventory to help the company grow.  If the owner dies in the first few years of coverage, the cost of term insurance will be less than the cost of whole life insurance.

In addition to cost, insurability is a key consideration. The ability to maintain life insurance throughout a owner’s life is important. Whole life insurance policies grant coverage until death that may not be cancelled by the insurance company. This feature has persuaded many that whole life insurance is the GO To method of financing a buy/sell agreement.

Term life insurance providers have modified their products so that policyholders can purchase term life with either a guaranteed insurability option or lengthy (20- to 30-year) policy terms. The addition of a guaranteed insurability rider to a term policy will increase the cost of the term insurance but will still be lower than whole life premiums in the beginning years.

Growth is inevitable and with that the value of your successful company will increase.  The surviving owners should ensure that additional life insurance can be acquired.  This is easily accomplished with the purchase of the guaranteed insurability option which allows the owners to buy additional insurance at timed intervals.

Whole life or term life insurance funding of a buy/sell agreement can be one of the best ways to ensure continuity of your company. Taking the time to figure out what is the best type of policy to use can be very challenging.  Your life insurance professional can certainly take on this weight and should make you feel confident that they will utilize their knowledge and skills to help build your business continuation plan that meets your present and future needs.