What Is a Buy-Sell Agreement?
A buy-sell agreement is a legally binding contract between business co-owners that governs what happens if one owner dies, becomes disabled, or wants to leave the business. It establishes the terms under which the remaining owners can buy the departing owner's share.
Without a buy-sell agreement, a deceased owner's share may pass to their spouse or heirs — people who may have no interest in or ability to run the business. This can lead to disputes, forced sales, and even business failure.
How Life Insurance Funds the Agreement
Life insurance provides the cash needed to execute the buy-sell agreement. Each owner purchases a policy on the other owners' lives (cross-purchase arrangement) or the business purchases policies on each owner's life (entity-purchase arrangement).
When an owner dies, the life insurance proceeds provide the immediate cash needed to buy out the deceased owner's share from their estate, ensuring a smooth transition with no financial strain on the business.
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Get Your Free QuoteStructuring the Agreement
The coverage amount should match the current value of each owner's share. Include a valuation method (agreed value, formula, or independent appraisal) and update it regularly.
Term life insurance keeps costs low for younger partners, while permanent policies work better when partners plan to stay indefinitely and want to build cash value as an additional business asset.