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The Benefits of a Buy-Sell Agreement Funded By Life Insurance

Taking care of your family and your business after you pass is important to many business owners, so exploring your options for insurance agreements can prove to be beneficial to receive the best outcomes. One option is a buy-sell agreement funded by life insurance, which will ensure that your family and your business will be taken care of. Here, the qualified life-insurance providers at Unity Insurance detail the specifics of a buy-sell agreement and their potential benefits. 

What is a Buy-Sell Agreement and How Can It Be Funded By Life Insurance

Buy-sell agreements, also known as buyout agreements or “business wills”, are legally binding agreements that take place between the co-owners of a business. These agreements dictate the circumstances that will occur if a co-owner were to pass, chooses to leave, or is forced to leave the business. If the co-owners choose to fund the buy-sell agreement by life insurance, either the co-owners, or the company itself, purchase life insurance policies on the lives of each co-owner. Therefore, if you were to pass, your fellow co-owners or the company reap all of the benefits from their life insurance policies. Additionally, your family will be provided with financial support by receiving a percentage of your interest in the business. 

Types of Buy-Sell Agreements

There are several different types of buy-sell agreements, with cross-purchase plans and entity redemption plans being the most commonly used structures. Hybrid options are also available, which simply combines the previously stated plans into one. A cross-purchase plan takes place when each co-owner purchases a life insurance policy on the other/s. Each pays an annual premium and therefore becomes the beneficiary of each policy. If any of the co-owners were to pass, the surviving owner or owners will then use the death benefits of the deceased to buy out the deceased’s share of the business. Alternatively, an entity redemption plan takes place when each co-owner has already made a previous arrangement regarding the sale of their interests in the business. The company itself purchases life insurance policies on each of the owners, as well as paying the premiums and becoming the beneficiary. If you were to pass, your share of the company stock will either go to your heirs or your estate, in which case the company may choose to purchase your shares from them. Finally, a hybrid option will combine both the cross-purchase plan and the entity redemption plan. In this case, the co-owner will be required to offer up their interest in the business, and after their passing, if the business is unable or unwilling to purchase the deceased’s interest, the remaining co-owners have the ability to purchase those shares. 

Benefits & Considerations

Any business can benefit from buy-sell agreements, no matter the entity – corporations, LLCs, or partnerships. Funding buy-sell agreements with life insurance can ensure that these agreements are funded properly, as there will always be money readily available if a death were to occur and the buy-sell would need to take place. If a death does occur, the earnings are often paid quite quickly, and may even be made accessible to purchase your interest shares. Plus, funding with a life-insurance policy leaves you free from income taxes. 

However, there are several tax implications you should consider when using life insurance to fund a buy-sell agreement. Foremost, if the company happens to be a C corporation, or a business in which the corporation is taxed separately from its owners, any earnings from a death will be subject to the alternative minimum tax. If insurance premiums are used to fund a buy-sell agreement, they are not tax deductible, and if the payment premiums are made by a business in which the owner is not insured, they are not considered as taxable income. Additionally, any cash value of policies on the other owners or shareholders’ lives, owned by the deceased, will be in the estate of the deceased. 

Consult With Insurance Experts at Unity Insurance 

Funding a buy-sell agreement with life insurance can provide you with the confidence and ease you need to ensure that your family and your business are receiving the utmost protection if you should pass. Not only do the benefits outweigh the costs, but you and your family will receive financial coverage and protection for years to come. Our team at Unity Insurance has extensive experience in insurance coverage and is determined to help find the best policy plan for you, your family, and your business. Insurance policies, agreements, and taxes can be overwhelming and confusing, so consulting with an expert to guide you through the process can leave you feeling assured and comfortable about your options. To learn more about our team and how Unity Insurance can assist you with your insurance needs, click here