Protecting your business with buy-sell insurance
While business owners may include a buy-sell provision in their shareholder agreement, many small business owners do not know what a buy-sell agreement is, and how simple it can be to set up.
Buy-Sell insurance provides funds for buying out the ownership interest of a partner when he or she dies or becomes disabled.
With an unexpected death of a business owner, whether or not it is a small business, partnership, or family farming operation – In the absence of a clear arrangement and adequate funding, surviving partners often feel “stuck” after the death of one partner, and the aftermath of having to deal with that partners spouse.
So how can we begin to fix this? It’s simple….Really!
First, we have to understand the 3 different methods of a buy-sell agreement
- Promissory Note Method- Using this method, the operating company purchases a life or disability insurance policy on the life of each shareholder. The company names itself as the beneficiary of the policies and a Buy/Sell funding agreement is put in place requiring the surviving shareholder(s) to purchase the shares of the deceased shareholder at fair market value (FMV). On the death of one or more shareholders, the company receives the insurance benefit and pays the proceeds to the surviving shareholder(s) as a capital dividend, allowing them to honor the promissory note.
- Corporate Redemtion Method- The operating company purchases an insurance or disability policy on the life of each shareholder, the company of whom is named as the beneficiary of each of the policies. This method would require the company to purchase and then cancel (or redeem) the shares of the deceased shareholder.
- Criss-Cross Method– Each shareholder purchases a life insurance policy on the life of the other shareholder(s), and names himself or herself the beneficiary. The shareholders and the company then complete a buy-sell agreement that requires the surviving shareholder(s) to purchase the shares of the deceased shareholder, at fair market value (FMV). If the shareholder dies, the surviving shareholder(s) use the proceeds paid from the deceased policy to purchase the shares from the shareholders estate.
Regardless of which method you think might work well for you or if you already have a structure in place but want a second opinion, an independent financial advisor is a key component to helping you structure the most efficient buy-sell agreement for your business, and find the appropriate coverage for you. Lets work together.
If you are interested in learning more about how to bulletproof your business structure, and get a free no obligation review from a TRUSTED SASKATOON financial advisor, contact me today!