Buy-Sell Agreement Funding

A buy-sell agreement is a legal contract between business owners that outlines what happens to ownership if one owner dies, becomes disabled, or leaves the business. Funding the agreement with life insurance ensures the remaining owners have the capital needed to buy out the departing owner’s share without putting financial strain on the business.

Life insurance is one of the most efficient ways to fund a buy-sell agreement because it provides liquidity exactly when it is needed most.

Types of Buy-Sell Agreements

There are three common structures used when funding buy-sell agreements:

Cross-Purchase Agreements

In a cross-purchase agreement, each owner purchases a life insurance policy on the other owners. If one owner passes away, the surviving owners receive the policy proceeds and use those funds to purchase the deceased owner’s share of the business.

Entity Purchase Agreements

In this structure, the business itself owns the life insurance policies on each owner. If one owner dies, the business receives the death benefit and buys back the ownership interest from the owner’s estate.

Wait-and-See Agreements

This hybrid approach allows the business or the remaining owners to decide who will purchase the departing owner’s shares when the triggering event occurs. The amount of insurance needed depends on the valuation of the business and each owner’s ownership percentage. The best way to determine the proper structure and coverage amount is to speak with an experienced insurance advisor.

How to Fund a Buy-Sell Agreement

Funding a buy-sell agreement with life insurance ensures a smooth transition of ownership while protecting both the business and the owner’s family.

Comfort Insurance and Finances can help business owners structure and fund buy-sell agreements that protect the long-term future of their company.