common business use of term life
insurance has been the buy sell
agreement. It's especially useful
in small businesses or partnerships
where the death of one person can
significantly affect the continuing
functioning of the business at hand.
Let's look at the buy sell agreement and
affordable term life rates address
the underlying insurance need in such as
face it...one of the few ways to get
ahead in the U.S. is to start your own
small business. The average size
of companies in the U.S. is between 3-5 people.
The big headlines may be for large
corporations (and recently, their
layoffs) but the engine of this country
is small business. The two or
three person corporation, partnership,
or LLC is very common especially for
younger companies. In such a company, each partner typically has to
wear many hats and the the loss of any
partner would significantly affect the
ability of the company to remain an
ongoing concern. There's also the
contractual obligations and contracts
that bind the partners together in the
first place. What happens if one
partner passes away.
This is where buy sell comes into
play. Essentially a buy sell
agreement is between the partners or
owners of the company. It states
that if one person passes away, the
other person will buy out their stake in
the company. Since this can be
large sums of money, the best way to do
this is with life insurance. Term
life insurance is so inexpensive that it
provides a simple and effective means to
providing the cash needed so that the
surviving partner can buy out the
deceased partner's share of the company.
In this case, the beneficiary of the
term life policy would be the other partner.
It's important with life insurance to
have an insurable interest. This
means that you have some vested interest
in another person. The partnership
or company ownership establishes this
reason for a buy-sell is pretty obvious.
Let's take an example. Let's say
that two partners have opened a company
together. It's a straight
partnership with 50/50 ownership.
They both put in $75K each to start the
company which was a large investment for
both individuals. The unforeseen
happens and one partner passes away.
Now what? Most partnership
contracts and/or incorporation papers
deal with what happens when one partner
no longer wants to participate or passes
away. It usually involves the
other partner(s) "buying out" the shares
of the leaving or deceased partner.
At a minimum, the surviving partner
above must now come up with another
$75K. He/she may not have this
amount or coming up with this amount of
money suddenly will put a severe
financial burden on him/her. Or
worse yet, what if the person cannot
come up with the $75K? There may
be surviving family members who require
that the contract be fulfilled and the
deceased partner's share be purchased
with the money going to the surviving
family or the deceased's estate.
best to avoid these issues altogether
with a simple buy sell agreement based
on term life insurance. Term is
cheap life insurance so it makes it very
easy to these issues. You can look
at term life insurance on an individual
basis and even as a small group
(business term life insurance).
The latter may offer better rates and
more flexible underwriting requirements.
We would be happy to run both options to
see what makes the most sense. You
can request this service with our