Life insurance is designed to help protect a household from the financial hardships that may follow the untimely death of a primary wage earner. But how will a death affect a small business? One way of safeguarding a business is to create a buy-sell agreement. A buy-sell agreement is a contract between different entities within a corporation to buy out the interests of a deceased or disabled member. A buy-sell agreement also can protect the business from loss of revenue and cover the expense of finding and training a replacement.
What's the Right Time?
A buy-sell agreement can be put into place at any time, but it often makes sense to do so when a business is formed or when a new partner is brought in.
There are two main types of buy-sell agreements commonly used by businesses:
These agreements establish a market value for a key employee's share of the company.
Did you Know?
Only 30 percent of family-owned businesses survive into the second generation. Some 12 percent are still viable in the third generation, and only about 3 percent operate into the fourth generation or beyond.
Source: Family Business Institute, 2014
There are several options for funding a buy-sell agreement:
Several factors will affect the cost and availability of life insurance, including age, health and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policy holder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
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