UPDATED: Feb 25, 2020
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Buy-Sell Agreements (also referred to as Business Succession or Business Continuation Plans) are the second type of business life insurance policy profiled this week. These agreements are typically arranged between the owners of a business, and they detail what is to occur upon the death of an owner. Most agreements are designed, so the surviving owner(s) purchase the deceased owner’s portion of the business.
This is where the life insurance policy comes into play. The means to pay for the deceased owner’s portion of the business is often provided by the proceeds of a life insurance policy purchased by the company on the life of the owner. This is most often accomplished with either regular term life insurance or first-to-die life insurance.
The Fair Market Value (FMV) of the business is most often used by the insurance company in determining the amount of the policy it will issue. When determining the amount to issue on each owner, the insurance company will consider the percentage ownership of each owner. The insurance company will often refer to the actual Buy-Sell Agreement as well as the company’s financial statements when making its determination.
Most Buy-Sell Agreements are established with the assistance of a qualified attorney. A properly established agreement along with an acceptable FMV report for the business will allow the insurance company to issue the appropriate amount of coverage for each owner.
Please contact us with any questions you have regarding Buy-Sell Agreement term life insurance.