Business Uses of Life Insurance
Q: What is a buy/sell agreement?
A: A Buy/sell Agreement is a contractual agreement that provides for the continuation of a business in the event of the death or disability of a sole proprietor, partner or shareholder. An agreement may stipulate that, upon the death of a shareholder or partner of a company, the company or other partners buy back the deceased's interest in the business. Life insurance is commonly used to fund buy/sell agreements because it provides both liquidity and tax advantages in funding the transaction. Read more about how it works here.
Q: What is keyperson life insurance?
A: Maybe your business is operated primarily by one person or maybe your company is run by a small team of executives whose expertise is the lifeline of your business. The premature death of a key person could signal the premature death of the business. With a Keyperson Life Insurance Policy, a business can increase the chances of survival if it were to lose a key member of the organization.
- cover business debt
- leave working capital for a surviving partner(s) to continue the business
- identify and hire a replacement for the key person
- provide cash for the business in case there is a major revenue shortfall because of the loss of the key person
Q: How do you set up a keyperson life insurance policy?
A: The first factor to consider in setting up a Keyperson Life Insurance Policy is to determine how much death benefit is needed. The minimum usually considered is one times the key persons annual income, but other factors need to be considered. What if the business relationships of this person drive half of the company’s revenues? How difficult and costly will finding a replacement be? Are there business debts that would place financial hardship on the company?
Once the death benefit amount has been determined, the business would purchase the policy on the key person. The key person would be the insured and the business would be the owner, payor and beneficiary of the policy. Permanent or term life insurance can be used as a key person policy depending on the needs of the business and how much they are willing to spend.