Buy or Sell Business with Insurance
Asset Protection For Business Owners
Annuities and Life Insurance as Business Tools
Buy-sell agreements are written, legal agreements that documents in advance what is to happen to an owner or shareholder’s interest in the business should that party die, become disabled, retire, leave the business before retirement, or divorce. Each of these occurrences is considered a triggering event. A buy-sell agreement may include one or more of these triggering events.
Buy-sell arrangements also include a formula used to determine the amount the deceased partner’s or shareholder’s interest will be sold for, or include a stated amount that will be paid for the business interest. The agreement must also state that the surviving owners, shareholders, the business, or a third-party will buy the deceased owner’s interest and that the estate of a deceased owner will sell the interest to the buying party.
The funding arrangements of the plan are spelled out, including the specific insurance policies to be used. Contingencies are also covered, such as what will happen in case of bankruptcy, receivership, dissolution of the business, or if an owner sells his or her interest during the owner’s lifetime. Also included is how the agreement may be terminated.
Using Annuities and Life Insurance in Buy-Sell Agreements
An annuity or life insurance policy can be used in buy-sell agreements because it is an affordable alternative to using cash or borrowing funds. The amount of benefit to be paid from the life insurance proceeds is known and can be increased through the use of paid-up additions, a feature found on dividend paying permanent life insurance policies that allows additional permanent insurance to be purchased, or through the use of one year term insurance purchased with dividends from a permanent life policy. Another advantage of using life insurance is that is it paid out relatively rapidly to named beneficiaries upon the death of an insured.
When life insurance is used in a stock redemption, also known as an entity purchase buy-sell agreement, the company is the owner, beneficiary and premium payer. The stockholder or partner is the insured, and upon the insured’s death, the company receives the policy’s death benefit. The business then uses this benefit to buy out the deceased stockholder or partner’s shares.
Under a cross purchase buy-sell agreement, each owner is listed as an insured on policies owned by the other owners. The non-insured owners are the owners, beneficiaries and premium payers on each policy. Upon an owner-insured’s death, the death benefit is paid, and the remaining owners use the proceeds to purchase the deceased owner’s share of the business.
Third Party Buy-Out
If a third party is going to purchase the business upon the owner’s death, the third party is listed on the insurance policy as owner and beneficiary, and the third party pays the premiums.
Wait and See Arrangements
Under a wait and see agreement, more than one way of structuring the life insurance policies can be used. This is because more than one party is given the option to purchase the deceased shareholder’s or owner’s interest in the business. The business could be the owner, beneficiary and premium payer for a life insurance policy on each shareholder or owner. Upon an insured’s death, the business could use the funds to purchase the deceased owner’s interest in the business or could loan the proceeds to surviving owners or shareholders in order that they may purchase the deceased’s owner’s interest. Or, the insurance could be structured as it is under a cross purchase agreement, and if the surviving owners decide not to purchase the deceased owner’s share, they could loan the insurance proceeds to the corporation to do so.
Split-dollar plans are plans under which the employer and employee split the cost of the insurance as well as the ownership rights, premium payments, death benefits, cash values and dividends. The intent is to give the employee the benefit of additional life insurance at little cost to the employer.
The split-life policy is a combination of a whole life or Indexed Universal Life or a term life insurance contract and an annuity contract. The savings feature is a retirement annuity to age 65 and the life insurance feature is usually yearly renewable term insurance. The sale of the split-life policy has not been approved in all states, because it seems to discriminate in favor of those individuals who purchase annuities. Those who do not purchase an annuity along with their life insurance do not receive the same low-cost benefits as those who do purchase the annuity. The insurance contract may be renewed as long as the annuity premium continues to be paid. The most common amount of coverage found is up to $10,000 of term insurance for each $10 of annuity premium paid.