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Types of Agreements Of the two principal types of buy-sell life insurance agreements, a cross-purchase plan and an entity purchase or stock redemption plan, the former gives a business owner the chance to buy life insurance on behalf of one or more partners. The surviving owners can then use the death benefit to buy the deceased partner's shares in their mutual business. The latter is one where each owner or partner is part of an agreement, with the business in question, for the sale of his or her individual shares to the business. Learn more about different types of business life insurance options here. The Local Life Agents Advantage You'll be working with an Independent Life Insurance Expert. Establishing a buy-sell life insurance agreement requires the insight and counsel of a skilled and experienced independent life insurance agent, someone with a proven record of success regarding this type of coverage. Everything for the agreement to the funding of the agreement with life insurance has to be structured correctly.
Benefits of a Buy-Sell Agreement You'll need to hire a business or tax lawyer to help you draft the buy-sell agreement. Although there'll be costs involved, they're nothing compared to the benefits. A buy-sell agreement will eliminate family feuds, keep the business afloat, and prevent problems with liquidity. Types of Buy-Sell Life Insurance Agreements There are three main types of buy/sell life insurance agreements that you should know about. They are: Cross-purchase plan In a cross-purchase plan, every shareholder owns a life insurance policy on the other business owners. Therefore, if one owner dies or becomes permanently disabled, the life insurance proceeds from the policies held by the other survivors will cover the cost of purchasing the deceased owner's interests. The policy ensures that each partner has access to funds to purchase the departed owner's shares without compromising the company's liquidity. A cross-purchase plan is not realistic if there are multiple partners in the business.
Tim is a licensed life insurance agent with 23 years of experience helping people protect their families and businesses with term life insurance. He writes and creates stuff for QuickQuote and other insurance and financial websites. Full Bio → Written by Benjamin Carr was a licensed insurance agent in Georgia and has two years' experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism. Reviewed by Benji Carr Former Licensed Life Insurance Agent UPDATED: Mar 30, 2021 Advertiser Disclosure It's all about you. We want to help you make the right life insurance coverage choices. Advertiser Disclosure: We strive to help you make confident life insurance decisions. Comparison shopping should be easy. We are not affiliated with any one life insurance company and cannot guarantee quotes from any single company.
Your death benefit is free from taxes, but there may be other tax factors to consider depending on the type of business you run.
It also: Assures remaining owners that the deceased's share of the business will not pass on to someone unsuitable Assures continuity for customers, creditors and employees Use these life insurance products to fund a buy/sell agreement Buy/sell agreement case study Risks, costs and benefits of the buy/sell strategy should be evaluated carefully. Guarantees are subject to the claims-paying ability of the issuing life insurance company. Neither Nationwide nor its representatives give legal or tax advice. Consult your attorney or tax advisor for answers to specific questions.
For instance, if death occurs to one of the members or partners, the percentage ownership of the deceased would go to the family if the buy-sell agreement is not set upright. This can be good or bad. In most cases, it is bad because the deceased family members don't know too much about the business and what it takes for it to be successful. This is why a buy-sell agreement is so important. It protects the business and its remaining partners if any member leaves become disabled, or dies. Funding Buy-Sell Agreements With Life Insurance Funding a buy-sell agreement with life insurance will give the partners or members peace of mind knowing if the worst-case scenario happens the company will still move forward. When considering buy-sell life insurance it is normally a term life insurance policy. This will be the most affordable life insurance and it can be in most cases a tax deduction for the company. In the event of a partners death then the death benefit will buy out the family members and the deceased owners share will be split amongst the remaining owners.