Funding a Buy-Sell Agreement with Life Insurance

As owner or co-owner of your business, you have put a lot of energy into its lasting legacy. Using life insurance to fund a buy-sell agreement can give your family and your co-owners peace of mind upon your death.

How It Works

This process requires an insurance policy to be put in place before passing by the company or a fellow co-owner. The company or co-owner, in turn, uses those funds to pay your family or estate for your full ownership interest in the company. This allows for smooth transitions for the company, as well as financial stability for your family at the time of your death. The transition process and funding amounts are clearly laid out in the agreement, which gives everyone involved clear paths moving forward.

Setting It Up

The details of using life insurance to fund a buy-sell agreement can vary according to your business. You can choose to let the business fund the life insurance plan or each co-owner can buy a policy on behalf of another co-owner. If ages, health, ownership percentages, or other factors vary widely among business owners, policy costs can also vary widely.

Tax Factors to Consider

Any profitable gains when the insurance policies are taken out or are surrendered for cash are potentially subject to federal income taxes. You can talk with your advisor and CPA about this concern. He or she can maintain awareness of any changes in growth or loss that could impact your taxes along the way.

Keep Up With It

Owners should remain diligent about how much their ownership value is worth over time, and whether their policies still cover that. The buy-sell agreement should clearly state how to handle either a deficit or excess of funds in the policy. Your advisor can help you keep track of your policies and ensure you are on track toward your buy-sell goals.

If you want to learn more about how this process works, contact your advisor to discuss your options.

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