Are you a business owner considering a buy sell agreement life insurance policy? You understand how hard it is to make sure your company is successful and profitable. If you’re a co-owner or partner of the company, you’ve also spent time helping the value of your business grow. By using a buy sell agreement, you can solve several key problems in your business. Let’s see how buy-sell agreements can help protect your business interests.
Buy Sell Agreement Life Insurance
Here are some important questions that every business owner needs answers to:
- What would happen you your company if you were to die?
- What would happen to your business if your partner passed away?
- Would you own the company outright if your partner died or would you have to share with their heirs?
- What if you were ready to move on from your business and pivot to something new?
You need to have a plan in place for these situations. What would happen to your employees, your family, and the company you’ve created?
A Buy-Sell Agreement would provide you a proper plan to protect your business and family from disaster.
What is a Buy Sell Agreement?
A buy sell agreement is when an agreement happens between the co-owners of a business. This agreement governs what would happen to the company if an owner died or left the business. It could be described like a “Will for a company.”
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- You are a co-owner of a company and want to eliminate the ability of the other owners from selling their business interests to someone else who you feel may not have the best interest of your business in mind.
- You’d like the owners have to sell off their company interests of the business if they retire, die or become disabled. That way the remaining owners of the business can gain full control of the business.
- A life insurance policy can create a cash value lump sum in order to fund a buy sell agreement.
- The life insurance policy’s proceeds will typically be income tax free. If you’re a C-Corp, you may be subjected to AMT (Alternative Minimum Tax).
- If you have an S-Corp, it prevents the transfer of stock to an ineligible stock shareholder.
- If you policy’s cash value has built up sufficiently, you cash value funds are available to access to buy you company interest if you were to become disables or retire.
- The buy sell transaction is able to be settled quickly due to how fast life insurance proceeds are typically paid.
- Allows liquidity in order to pay for IRS estate taxes and other estate settlement costs.
- It can begin the funds necessary for the down payment with a buy out for retirement of the owner.
- Provides help for the owner’s family financial situation if the owner passes away.
- Can maintain your business by restricting the stock transfer to pre approved members of non-owners, family members or other owners.
Funding a Buy Sell Agreement Using Life Insurance
Fully funding your buy-sell agreement is extremely important. Sometimes the only way to fully fund an agreement is using a life insurance policy. By using a fully funded buy sell agreement, it makes sure that your part of the business will be paid for in full. This means that your family will get the cash that they need and won’t have to worry about dealing with all the business drama.
The amount of life insurance coverage you should target should be equal to the value of the ownership interest you possess. So when you pass away, enough cash from your insurance policy will pay your estate or family in full for your percentage of the company.
The best and easiest way to secure life insurance for a buy-sell agreement is to use an independent life insurance agent. With all the factors that need to be addressed, it can get complicated. When you use an independent life insurance agent at Life Insurance Blog, you’ll get access to over 40 top rated companies. We’ll be able to find the best policy for your situation.
Do you need a policy issued as soon as possible? If you need a policy in less than a week, we have you covered. Policies that are issued very fast can be more expensive. However, sometimes the timing of the buy-sell agreement is more important than getting the absolute lowest premium.
If you’re not pressed for time, we can research the best company and find the lowest priced policy that you can qualify for. So whether you’re looking to secure life insurance as fast a possible or get the lowest premium, we have you covered.
What if My Company’s Value Changes Over Time?
What would happen if your business continues to grow? What would happen if the life insurance policy’s proceeds end up to be less than what the value of your company interest?
Your beneficiary or family could end up receiving less than the true value of your business interest. You need to make sure that your buy sell agreement specifies and details how the valuation difference will be taken care of. What if the value of your business is less than the life insurance proceeds when you die? You need to make sure that the buy-sell agreement address this scenario right away. You need to detail if the excess funds will be issued to the surviving owners, your family, the business or your estate.
Buy-Sell Agreement Types
There isn’t just one buy-sell agreement. There are several types that you need to be aware of.
- Cross-Purchase Plan: If your business has 2 or 3 business owners, a cross-purchase plan might be the best option. With the cross-purchase plan, every owner of the company would buy a life insurance policy on each of the other owners and own the life insurance plans. If one of the owners were to die, the surviving owners receive the life insurance death benefit to buy the deceased partner’s percentage of the company.
- Redemption Agreement: With this type of buy-sell agreement, the business will purchase the deceased or exiting owner’s shares of the company. The business will usually have a policy for every business owner and use the death benefit to buy the deceased business partner’s share. The company will pay the premiums and the company is the beneficiary and owner of the life insurance policy.
- Wait and See Agreement: Also known as a hybrid agreement, a Wait & See Agreement is a mix of Cross-Purchase and Redemption Agreement. It requires the remaining partners and the business to buy the interest of the deceased owner. The company can purchase life insurance policies on each co-owner, each co-owner can individually purchase policies on each co-owner, or you can mix both of these methods.
Buy Sell Agreement Life Insurance Tax Implications?
What are the possible tax consequences? There are several situations that you need to be aware of with regards to buy-sell agreement life insurance tax implications.
- If your policy was issued after 8/16/2006, the life insurance death benefit on the life of a company employee payable to policy owner/employer can be subjected to income taxes. There are exceptions that apply however.
- Are you a C-Corporation? The proceeds received from an entity purchase agreement can be subjected to the Alternative Minimum Tax (AMT).
- Did you cancel or surrender your policy for cash in order to buy out your interest while you were alive? Any gains from your life insurance policy is subjected to federal income tax if you are the policy owner. Beware that your policy may have surrender charges. Gains include all life insurance policy loans that are outstanding at the time of the surrender.
- Is your business a corporation? Is it taxed as a corporation? If a co-owner passes away, their estate will become the owner to the life insurance policy covering the other co-owners of the company and you in a cross purchase agreement. What if the life insurance policies are transferred to the surviving co owners to purchase future buy outs? A transfer for value may occur and part of the proceeds from the transferred life insurance policies may be subjected to taxes.
Benefits of Buy-Sell Agreements
If your business is a partnership, corporation, proprietorship, or LLC – you need to think about a buy-sell agreement. It is recommended by financial planners and business experts to make sure that cash will be available if a buy-sell situation occurs. Life insurance benefit payouts are typically paid fast which is vital for business stability. For the majority of buy-sell agreement situations, the life insurance policy death benefit is income tax free no matter who own the life insurance policy.
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