Buy-Sell Agreement: Include Life Insurance For Business Partners

If you or a business partner pass away, it could be devastating for your employees who depend on you and the company you worked so hard to build.

When you enter into a business partnership, it is important to stay protected and you can do this in a variety of ways. You can protect you and your company in the event that something unexpected happens with:

  1. A business partnership agreement
  2. A business insurance policy
  3. A buy sell agreement, or
  4. A corporate owned life insurance policy

Drawing up a partnership agreement early on in the business planning stages can provide simple, legal steps in the event that your partner passes away or wants to leave the company. It can provide legal protection if you pass away.

Who is Buy-Sell Agreement Life Insurance Best For?

Consider this: In many cases, small business owners and partners use their personal or family assets as collateral to secure business loans to start the company. In the event that you pass away or your partner passes away, this presents a lot of legal entanglements involving the company and your families.

Family members might not to in a position to take over the business and having personal assets tied up in business loans can make it impossible in some case for them to sell the business.

This can force family members left behind to sell off the company for less than it is worth, or to sell it in suboptimal market conditions. This hurts the family, the co-owners or partners, and the employees.

If you have partners and you pass away unexpectedly, they can step in and take over your shares and vice versa.

If there are more than one co-owner and the business is thriving, an unexpected disability or death of one partner, could leave the rest to bear the burden of a liquidation, unpaid debt that must be paid before assets can be disseminated to remaining partners, and anything in between.

Business Partnership Agreements

What is a Partnership Agreement?

A partnership agreement is an agreement that you and your partner (and sometimes their spouses) sign which explains what steps you will take in the event that one of the partners passes away. It provides a legal ruling on what steps happen to the company. If you do not have one in place, you risk the company being dissolved legally if something terrible happens.

What Happens If a Business Partner Dies In a Partnership?

If your business partner passes away, what happens next is contingent upon a handful of factors. Traditionally this would mean that you could a) sell off the entire business and in so doing, liquidate all assets or b) bringing in an heir to the former partners’ estate to take their place. These are not the most appealing of options.

That is why partnership agreements exist. If you both signed a written partnership agreement, there will likely be a clause indicative of what steps to take in the event that one or both of you become permanently disabled or pass away. Many options can be included such as:

  • The deceased estate taking over your former partners’ share of the partnership
  • The former partner’s share being transferred to you upon payment to their estate
  • An option to buy their share with a financial formula

You might have also undertaken what is called a “buy/sell agreement”. For this, both partners and their respective spouses enter into an agreement and together negotiate terms for the transfer of the partnership share to one business partner in the event that the other passes away. Such agreements tend to ensure that if the worst should happen, everything regarding the business goes smoothly.

What If a Business Partner Dies and There Was No Partnership Agreement?

If you did not have a partnership agreement in place, then the Partnership Act for the state in which your business operates will regulate the next steps.

Generally, the partnership will be immediately dissolved after one partner passes away and then you, as the remaining partner, have to pay the deceased partner’s estate a debt for their share of the partnership after this is done.

This is not only stressful, but it takes a lot of time. Moreover, if you want to keep the company thriving, this becomes difficult, if not impossible.

Can you deduct life insurance premiums as a business expense?

You cannot deduct the cost of life insurance premiums paid on behalf of anyone who has a financial interest in your business.

If your business is the beneficiary of the policy you cannot deduct the premiums as a business expense.

Business Life Insurance

What is business life insurance?

Business life insurance is a form of life insurance whereby the insurance company agrees to pay the beneficiary of your deceased partner a set amount of money in the event that they pass away.

You can also set up the business partner life insurance agreement which names you, as the surviving partner, or the business as the beneficiary of the business life insurance policy.

Why do you need business life insurance?

Business life insurance can be a beneficial way to cover the costs of any remaining business debts without them becoming the burden of the company and remaining partner.

Even if you have a buy/sell agreement or business partnership agreement in place, having the extra coverage from business life insurance can provide you with a death benefit to help keep the company afloat while the other agreements give you control over the company and its assets rather than having to legally dissolve the company.

What happens when the owner of a sole proprietorship dies?

If the sole proprietorship passes away, any remaining business assets still must pass through probate. New owners of the business will need to settle any outstanding debt before they can claim the business assets. Again, having additional business life insurance policies can help offset these costs so that the business remains profitable.

Buy Sell Agreement Life Insurance

What is a buy-sell agreement in life insurance?

A buy-sell agreement is an agreement between co-owners of a company. This is also called a “buyout agreement” sometimes. When a co-owner passes away, having a buy/sell agreement can ensure the remaining partner is given control.

These agreements do not just apply to situations where the co-owner passes away, but can extend to situations where a co-owner simply leaves the business or is forced out.

What Do You Need a Buy-Sell Agreement?

There are a handful of situations which warrant having a buy/sell agreement:

  1. You and your business partners might get along very well right now, but there is always the opportunity for a dispute. If that happens, a buy and sell agreement can help you to establish a fair value of the business if one of you wants to leave the business or if one wants to buy out the other.
  2. You could have a co-owner who tries to one day sell their interests in the company to another person or entity, and you know that said person or entity does not have the best interests of your business at heart, so with this agreement you could place restrictions on the other owners and their ability to sell. This is something that often happens when a co-owner wants to leave the company after some time, and perhaps give their share of the partnership to their child or to a new business partner who may want to take the business in a direction far from the original.
  3. In the event that a co-owner passes away, you could set up your agreement to stipulate that the remaining partners are given control of the company when another owner dies or is otherwise incapacitated. This prevents their assets or shares in the company from being liquidated if they pass away, and prevents the company from being dissolved because of a lack of agreement.
  4. Alternatively, you might want to stipulate that all remaining owners must buy existing interests of a deceased owner in order to guarantee liquidity, you can use a buy/sell agreement.

Is Buy-Sell Life Insurance Tax Deductible?

The premiums used to fund your buy/sell agreement are also not tax deductibles. The premium payments made by a business, if the shareholder or the owner is the person insured, it is not considered taxable income.

Corporate Owned Life Insurance Policy

What is a corporate owned life insurance policy?

A corporate owned life insurance (COLI) policy is a life insurance policy purchased by a corporation. The corporation then becomes the total or partial beneficiary for the policy.

The employees or owners are listed as the insured. This is different from other policies because other group life insurance policies are in place for the benefit of the employees.

That means that the employees and their families are protected.  The corporate-owned life insurance policy can be structured in different ways to protect the company:

  • One common example is a non-qualified plan like a split-dollar policy where the company can recoup its paid premiums.
  • Another common form is where a key employee is given the death benefit should the other owner pass away.
  • There are also buy-sell agreements where the company gets a death benefit if the owner or a partner passes away. In these cases, the death benefit is usually used to buy some if not all of the company shares which were owned by the deceased.

Tips for Business Owners Looking for Life Insurance 

If you have a business, you clearly have many options at your disposal to protect the company. There are plenty of reasons why you and your business partners would want to set up things like a buy sell agreement or business insurance. It is not just to protect things in the event that a partner passes away, but just to protect your business interests.

Now, it is in your best interest to consider different policies. You might have a personal policy to protect your family and their interest.

Then, you can combine life insurance policies for each co-owner of a business with the buy sell agreement. Any of the insurance policies listed above could prove the key to your company surviving in its currently profitable state, and alleviate any legal disasters if a partner or business owner should pass away.

How to Find the Best Buy-Sell Agreement Life Insurance Rates

When it comes to looking for buy-sell agreement life insurance, or any type of life insurance as a business owner, it is essential to make sure that you compare your options in order to understand which life insurance policy is best for your business.

In order to do this, it is best to work with an independent life insurance agent who can compare multiple business life insurance policies from manty of the bets life insurnace companies at once.  They will then help to understand your situation, and which life insurance policy is best for you, your business, and your family.

Give one of our agents a call today, or use our online quoting engine to compare life insurance rates for business owners instantly!

Compare Buy-Sell Agreement Life Insurance Rates

Insure your business and your family at the same time.

 

 

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