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Life insurance is key component of your Business succession plan

Succession planning is critical to supporting the effective transition of a business from one owner to the next or from one partner to other partner(s). Without a plan in place, a thriving business could fail in an instant, jeopardizing the financial futures of all those who rely on the business and its success.

A Buy-Sell agreement is at the heart of many business succession plans. However, the agreement itself is not enough. A Buy-Sell agreement without some way to fund the buy-sell, like a permanent life insurance policy can make it too difficult for a surviving owner or owners to execute the agreement because many do not have the personal funds.

Do you have business partners? Ask this question: If your partner should unexpectedly die do you have the personal funds to buy out his/her heirs or are you prepared to have them become your new business partner?

By implementing a buy-sell agreement, your business is more likely to continue running smoothly after the death of one of the owners. The remaining owners can rest assured that business will remain in their control and they will not need to work for any outside parties.

Contact a Business Life Insurance specialist at Mountain Insurance to determine what type of plan is best for your business.

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Most common Denver Buy-sell Life Insurance questions from our clients

What are the advantages of Life Insurance funded Buy-Sell agreements?

    • Current business owners remain in control and avoid the intrusion of new and inexperienced owners or the need to invite a spouse or other heirs Into the business.
    • Business continuity is assured, maintaining employee morale and the firm’s goodwill
    • Business owners are assured of the right to buy the deceased owner’s business interest at a predetermined price.
    • It enables the surviving owner(s) to avoid the need to obtain credit to purchase the interest.

Are all Buy-Sell agreements the same?

NO, buy-sell agreements generally fall into board categories:

  • entity plan agreements
  • cross-purchase plan agreements

The primary distraction between the two if the party that will be responsible for purchasing the deceased owner’s interest and pay the insurance premium. An Entity Plan Agreement is an agreement in which the business agrees to purchase the business interest and the life insurance policies. This is best for an organization with multiple owners.

In a Cross-Purchase Agreement, the owners commit to buy/sell their interest at the time of his/her death to the surviving owners. The owners (usually no more than 3) commit to purchasing life insurance policies on each other.

What type of life insurance policy is best to fund a Buy-Sell Agreement?

As with all life insurance purchases, the decision is a balance of needs vs cost. Universal Life or Indexed Universal Life often is the most desirable form of life insurance because of its permanent nature and it’s premium and death benefit flexibility. Premium payments can be decreased or suspended or suspended during periods when cash flow is low. Whole Life Insurance is also recommended as it provides guaranteed cash values, unlike all other policies. If cash is an issue, then Term Life Insurance may be the best answer.

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