Life insurance can be used to provide the funds necessary to finance a buy-sell agreement that preserves the value of the business.
It is an agreement between co-owners of company that governs what will happen to the business if the one of the owner’s dies or leaves the company. A buy-sell agreement is a contract that binds the owner of the business interest to sell at his or her death, and a designated buyer to buy at that time, the business interest for a specified or determinable price.
A requirement of life insurance is that a valid insurable interest exists at the inception of the policy
A guarantee that there will be a market for the closely held business interest
Liquidity for the payment of death taxes and other estate settlement costs
Establishment of the estate tax value of the decedent’s business interest, making the estate planning process more reliable for the owner
Continuation of the business in the hands of the surviving owners and/or employees
Improved credit risk because the probability of continuation of the business is enhanced
The Buy-Sell agreement may be appropriate if expected to end by age 65 or 70
Low annual premiums in the early years are important
The purchase and sale are triggered by an owner’s disability or retirement
The insurance is needed as a source of liquidity or collateral for the corporation
The term insurance can be replaced with permanent life insurance