Buy-Sell Agreement Funding With Life Insurance
What is a Buy-Sell Agreement?
A Buy-Sell Agreement is a legal agreement between business owners that pre-determines how to dispose of a deceased owner's interest in the business. This agreement should include the details of who will purchase the business interest, what is the fair price, when will the sale be made and where will the funds come from.
Reasons for establishing a binding Buy-Sell Agreement.*
Guarantees a market for the sale of the business interest.
Advantages of using life insurance to fund a Buy-Sell Agreement.
Minimizes the possibility that the business might fall into the hands of outsiders or inexperienced heirs.
Provides the deceased's family a fair price for their business interest previously agreed upon by all parties.
Ensures business continuity for the surviving business owners by providing unrestricted control of operations and future earnings potential.
Death benefit provides the cash needed to fund the purchase agreement.
Eliminates the need to build a cash reserve which may take many years and may be inadequate, resulting in the liquidation of surviving owners' assets.
Death benefits are income tax-free under the current tax laws.
Total premiums paid are normally a fraction of the of the cash received as a death benefit.
Creates cash for the deceased's family to replace lost family income and pay estate settlement costs.
Key Employee Life Insurance
What is Key Employee life insurance?
Key Employee life insurance is any type of life insurance purchased by a business on the life of a key employee. A key employee is anyone whom the business deems to have a substantial impact on the financial success of the business and is not easily replaced, especially in a small business that lacks a pool of candidates. A key employee is typically responsible for management decisions, is highly paid, has a significant impact on sales and/or has a special rapport with customers and creditors.
Reasons for protecting a business after a Key Employee's death.
Death causes a loss of management skill and experience.
Advantages of Key Employee life insurance.
Client confidence may lessen resulting in a disruption in sales or production.
Business may experience credit difficulties if creditors hesitate to extend loans.
Expenses are incurred to hire and train a replacement.
Employer receives funds from policy's death benefit which can be used to train a replacement and pay other expenses.
Death benefits are exempt from regular income tax, although they may be subject to the corporate alternative minimum tax.
The cash value of a permanent policy is available for use while the policy is in force and the employee is alive.**
* Stephen M. Polizzi Insurance Agency, Hazard & Siegel Inc. and their agents do not provide legal or tax advice. For specific legal or tax advice concerning your situation, please consult your attorney or tax advisor.
** Withdrawals and loans may reduce the cash value and death benefit of the policy and may have tax consequences.