Your business partnership deserves a plan for what comes next.
A buy-sell agreement establishes how an owner’s business interest can be purchased when a specified event occurs. Life insurance can help provide funding for that purchase after an owner’s death.
Who buys the ownership share—and how?
A buy-sell agreement is a legal contract that sets out how a business owner’s interest may be transferred after events such as death, disability, retirement or departure. Depending on its terms, it can identify the buyer, establish a price or valuation method, and explain how the purchase will be funded.
An attorney prepares or reviews the agreement. Your insurance advisor helps evaluate insurance funding that fits the agreement.
Who purchases the interest?
How is the purchase price determined?
Where will the purchase funds come from?
An agreement needs a funding plan.
When an insured owner dies, a payable life insurance death benefit can help the designated buyer purchase that owner’s business interest under the agreement. This can support the remaining owners and provide liquidity to the deceased owner’s family or estate.
Policy ownership, beneficiaries and coverage amounts must be coordinated with the agreement.
Important: Life insurance death benefits do not automatically fund retirement, voluntary departure or disability. Those events require their own funding arrangements.
What could this look like?
Imagine two owners each hold 50% of a business valued at $1 million. Their agreement may establish a $500,000 purchase obligation for one owner’s interest. Properly coordinated life insurance could help fund that obligation if that owner dies and the claim is payable.
This is an illustration, not a coverage recommendation. Actual funding depends on the agreement, business valuation, policy terms and underwriting.
Establish the purchase terms.
Arrange suitable funding.
Review the plan as the business changes.
Two common approaches
Cross-purchase
The other owners purchase the departing or deceased owner’s interest. In a life-insurance-funded arrangement, policy ownership and beneficiaries are coordinated with those purchase obligations.
Entity purchase
The business purchases the owner’s interest. The business may own and be the beneficiary of policies intended to help fund the purchase.
The appropriate structure depends on your business and circumstances. Your attorney and tax advisor should evaluate the legal and tax effects before policies are arranged.
See how life insurance can support a buy-sell plan.
Captions are shown in the video. Video narration voice: Piper text-to-speech (MIT License), voice trained on the LibriTTS dataset (CC BY 4.0).
When to review your plan
- You have multiple business owners.
- You have an agreement but have not arranged funding.
- Your business value or ownership percentages changed.
- An owner joined, retired or plans to leave.
- Existing policies may no longer match the agreement.
- You are a sole owner with an identified successor or buyer.
Frequently asked questions
Is the agreement itself an insurance policy?
No. The agreement establishes the legal purchase obligations. Insurance is one potential way to help fund those obligations.
Can we discuss insurance before we have an agreement?
Yes. An initial conversation can help you explore funding options while your attorney works on the agreement. Final policy arrangements should be coordinated with the legal plan.
Is this the same as key person insurance?
They serve different purposes. Buy-sell funding supports the purchase of an ownership interest. Key person insurance helps a business address financial loss following the death of a key individual. A business may need both.
How much life insurance should we consider?
The amount depends on the purchase obligation, ownership percentages, business valuation and other available funding. The business’s total value alone does not determine the coverage needed on each owner.
Can a sole owner use this type of planning?
A sole owner with an identified buyer or successor may have a suitable arrangement. The legal structure and funding require individual review.
Should the plan be reviewed over time?
Yes. Review it when ownership, business value, purchase terms or insurance needs change.
Discuss a funding plan for your business.
Tell us a little about your business. Mark will contact you to discuss life insurance funding options for a buy-sell agreement. No obligation.
Information is for general educational purposes and is not legal, tax or accounting advice. Coverage is subject to underwriting, policy terms, exclusions and availability. Agreement structure, valuation, policy ownership and beneficiary designations should be reviewed with your attorney and tax advisor.