INSURANCE FUNDED BUY-SELL AGREEMENTS

The untimely death of one participant in a successful business venture can create financial havoc. Not only does the business lose the income generated by the deceased, but it is also faced with the obligation of compensating his estate’s claim for the value of the business interest. There are squabbles about the value of that interest and assets must often be sold to meet obligations. In some instances the decedent’s “less than qualified” family members might insist upon participating in the business: It is their right to do so. Many businesses have collapsed under the load.

One effective method of softening the impact of an untimely death in the business is to enter into a so-called Buy-Sell Agreement. The participants agree in advance upon the prices of their respective interests. They then obligate the business to purchase their shares from the estate of any business partner that might meet with an untimely death. The cause for litigation is eliminated and the decedent’s family may not involve themselves in the business without the consent of the venture.

However, the buy-sell agreement is itself destined to fail, if the business does not have sufficient liquidity to pay the estate. The only viable solution is for the co-owners or for the business itself to purchase insurance on the lives of the several partners. The death benefit – if it matches the price of the interest being purchased – readily funds the buy-sell agreement. In the interim the insurance policies – if they are permanent – can accumulate cash value and themselves become important business reserves in times of distress. By the same token, the monies from the insurance policies become an important compensatory fund for the deceased businessman’s family. And the protection is in place as soon as the first premium is paid..

KEY EMPLOYEE INSURANCE

Another death knell to a successful business can be the loss of a key employee. Providence affords the employer an opportunity to purchase a life insurance policy on its key employees. If he or she meets an untimely death, the business can use the death benefit to offset the resulting financial losses and to fund a campaign for finding hiring and training a replacement. Life insurance gives the company the needed reserves to weather the storm.

DEFERRED COMPENSATION FOR KEY EMPLOYEES

The business can also offer key employees a life insurance policy as added compensation. If the employee dies before retirement, the death benefit is payable to his estate tax free. If the employee retires he can either be assigned the rights to the policy and its significant cash value; or the employee can elect to cash surrender the policy and withdraw the cash value – his or her deferred compensation. The key employee’s family has protection and a fantastic means for deferred compensation. What is more the lump sum can be assigned tax-free into a Providence annuity through which a monthly stipend can be paid to the retiree