Fund Your Buy-Sell Agreement with Life Insurance
Life insurance isn’t only used to protect your family from your premature death. Sometimes, Life insurance can be utilized to protect you from your business partner’s death. If that’s hard to wrap your head around, let me explain.
Consider this example:
You and your business partner operate a successful neighborhood pizzeria. Your typical gross monthly sales are $60,000/month. After covering all expenses, each of you bring home a profit of $10,000/month. This income provides a comfortable lifestyle for both your families. You plan to operate the pizzeria until retirement and hope that it will provide a small nest egg. A business broker that specializes in restaurant sales estimates the current value of your business at $400,000.
You’ve poured your heart and soul into building your business. What would happen in the event of your or your partner’s death?
Let’s consider the consequences of either of your deaths on your spouses, heirs, and each other..
So how do we solve this dilemma?
So how do we solve this dilemma? Without a doubt, this is a problem most business owners aren’t prepared for. The easiest way to solve this issue is by drafting a legal document known as a “buy-sell agreement”. Simply stated, this is a type of buyout agreement. The agreement allows the surviving owners of a business to purchase the interest of their deceased partner from their surviving spouse/heirs/estate at a predetermined price. This agreement solves all of the following problems:
It avoids costly legal battles between the surviving business owners and the deceased partners surviving spouse/heirs/estate
It provides a much needed cash payout to the surviving spouse/heirs/estate
The surviving partners avoid going into business with a deceased partner’s spouse/heirs/estate, which may have different goals for the business.
A partners death does not mean their surviving spouse/heirs need to change careers to operate a business they may know nothing about
It can protect business profitability for the remaining partners by eliminating the need to share profits with a deceased partners surviving spouse/heirs/estate.
In spite of having a “buy-sell agreement” (legally enforceable contract), the surviving owners still don’t have a way to finance/fund the purchase their deceased partner’s interest. Alternatively, businesses that maintain a large sum of money for such purposes probably aren’t using their capital business capital efficiently.
So how do you finance a buy-sell agreement?
The most cost efficient way to finance a buy-sell agreement is with life insurance. Using the pizzeria owners as an example, assuming each owner was a healthy 35 year old male, each could purchase a 20- year term policy $200,000 for about $16/month. Should one of the owners pass away, the surviving owner would now have the funds necessary to purchase the remaining interest of the business from the surviving spouse/heirs/estate of the deceased. Since most business interests are not liquid investments, funding a buy-sell agreement with life insurance can quickly resolve most issues for all interested parties.
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Keep in mind that term life insurance is not your only option when it comes to funding a buy-sell agreement. You may need an agreement that lasts your whole life, not just 20 or 30 years. If you need a permanent solution to provide for a buy-sell agreement, a Guaranteed Universal Life policy may provide a great alternative to inadequate term insurance and expensive Whole Life insurance.
We know you have questions. That’s why we are here to help. For more information on this topic or other advanced uses for life insurance, please give us a call at (718) 255-1687.