Life Insurance is a great way to fund buy-sell agreements where the death of an owner is the triggering event for the sale of the share of the company. The governing document of buying and selling shares of the company due to death is the buy-sell agreement. This is a document all partnerships should have in place at the time of formation or very soon thereafter.
Small companies owned by two or more people, related or not, really need to have protections built in. One of the biggest reasons for the sale of small companies and breaking up of partnerships is the need to cash out one owner’s family after the death of the owner. Situations like this can destroy companies as well. In the case of companies where there are several family members sharing ownership the costs to the family of a death can be devastating as surviving non owner family members of the deceased need the money to live their lives.
Not only does life insurance help, in situations of disability there are disability policies that can be used as well to help in that kind of situation. Ultimately the insurer provides money needed to make transitions of ownership possible without major financial hurt to those survivors.
In the situation of an untimely death for one of the owners, having enough money to pay the fair market value of the owners share of the company without having to encumber the company or personal assets for the surviving owners is key. When cash is not available to buy out the family as specified in a buy sell agreement the company may have to be sold to outsiders that can easily result in lower sales proceeds as well as potentially additional ownership not in line with prior operations. It could mean the surviving owners have to sell out and find a new job. All of these situations tend to make the owners consider how can, we retain control at the least risk to our own wellbeing.
By employing life insurance to pay for the sales costs associated with an owner dying, a small annual premium paid on an annual basis can ensure if a death occurs sufficient funds are there to transact the sale of shares to the surviving owners. Where the owner never dies and instead sells his shares to someone else, (s)he can change around the ownership of the life insurance policy (with the current owner’s consent) and have the policy for their own purposes. This is something more common when a permanent policy is used to cover the owner.
What happens is that each owner is insured usually with all other owners of the company as co-owners of the life insurance policy. So as an owner you will own/co-own life insurance on each other owner. Payment of premiums is decided as part of the buy sell arrangement. They can be aggregated and split evenly, or another common method that better accounts for owner’s age and health is that they pay for the policy on themselves even though others actually own the policy. After tax dollars are used to pay for the policy to ensure the death benefit is paid out tax free.
The only issue that can cause problems in such a use of life insurance is if one or more owner is uninsurable. Even then ultimately there are almost always an insurer who is willing to take on the risk, for a price. This is one of the situations where defining in the buy sell agreement splitting the cost for the life insurance is key.
Above is a general overview of the buy-sell use of life insurance. Really, if you think you are a candidate, it’s important to get with an agent to evaluate the situation and properly plan for it. We are here to provide professional guidance in picking the appropriate insurance in Texas to meet these needs. Give us a call to help ensure you are adequate protection to protect your assets.
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