When you own a business, you have a responsibility to your business partners and your family. Since you are self-employed, you must provide for your family when you are no longer able to work. It even goes beyond just protecting them when you are alive. You must provide for them if you become incapable of working and bringing business to your company.
However, it would be best if you also protect your business partners and their interests. You must protect their interests in the business if you die, become unable to work, get divorced, or file for bankruptcy. In other words, you cannot leave your business partners holding the bag for your life decisions and problems.
Buy-sell life insurance provides this type of protection to keep your business partners protected, your business operating, and provide for your family. This policy will keep your business assets with your business.
Why do you Need a Buy-Sell Life Insurance Policy?
A buy-sell life insurance policy is not typical life insurance. Instead, it is an agreement between business owners and shareholders. This type of contract allows your business partners to pay out a benefit to your family if you leave the business. It also maintains the ability to buy your shared part of the company to continue as usual.
You do not purchase buy-sell life insurance on yourself. Instead, you and your business partners buy a policy on each other. Therefore, if you leave the business for any reason, your business partners, who name themselves as beneficiaries, receive the policy’s benefits.
The idea is that the partners will provide your family with the benefit in exchange for their business interests. Then, your co-owners and shareholders are free to buy and divide your ownership in the company as they see fit. Your family is well cared for, and the business survives as intended.
Does Buy-Sell Life Insurance Only Help When you die?
Buy-sell life insurance is more of a business planning tool than an estate planning tool. While it will certainly pay out the benefit in the event of your death, it is not only used for a death benefit.
As a business planning tool, it is designed to help prevent business failure if you have to leave the business for any reason. Some of the most common uses for buy-sell life insurance include:
- Divorce or separation
- Retirement
- Bankruptcy
- Lifestyle or career change
In each of these scenarios, you leave the business vulnerable to being incomplete or allowing another person to come in and take over your interest. Such dynamics can ruin a business and cause all members to lose their interest in the business or force the company to close.
How Does Buy-Sell Life Insurance Help Protect a Business in the Event of a Divorce or Bankruptcy?
Many times, when a person forms a business, that person’s business interests become part of their estate. When it comes to retirement or career change, the person is merely leaving the business and giving up his claim. In the event of death, the person’s business interests go to the next of kin.
However, because it is part of the estate, a business owner may get forced to share his business interest with his spouse in the event of a divorce. His spouse would have the right to make decisions for the company or sell their portion of the owner’s shares to another person. In the event of a bankruptcy, the business interests will be part of the estate. The business assets can then get levied to help pay the debt. In both of these instances, filing a claim under the buy-sell life insurance agreement will prevent the company from becoming an asset in unrelated litigation. The remaining co-owners can benefit and pass that onto the business owner dealing with divorce and bankruptcy. That money can become a part of the individual’s assets while the business and its assets remain intact.
The remaining business owners can buy the remaining shares. In some cases, the original business owner can buy in separately once his legal issues are settled.
How big of a Buy-Sell Life Insurance Policy Should I buy?
The purpose of a buy-sell life insurance policy is to buy out a partner’s interest in the company. Therefore, the policy needs to cover a proportionate portion of the business assets. If a company is worth $10 million and has four owners, the buy-sell policy should cover one-fourth of the $10 million assets. Therefore, when one partner leaves or dies, he and his family will receive his share of the business assets.
The talented and knowledgeable agents at Hometown Life Insurance can help you determine the size of the policy you and your business partners should purchase to protect your business assets.
Do I Need Life Insurance in Addition to a Buy-Sell Life Insurance Policy?
The short answer is yes. It would help if you had additional death benefits on top of the buy-sell agreement. The buy-sell agreement is meant to protect your business partner’s interest in your combined business. However, it is not meant to protect your family or provide for them when you die. It is intended to provide financial benefits related to owning the business.
However, life insurance protects you and provides a benefit to your family specifically designed for them. Your life insurance policy will provide enough money to your family to help them survive for several years without you.
Your buy-sell policy provides a benefit equal to your share of the business assets. However, your life insurance policy can offer an advantage that considers your contribution to the household over many years. Therefore, if you bring home $1 million a year, you may wish to have a life insurance policy worth $5 million to $10 million to provide for your family for 5 or 10 years after your death for example.
Between your buy-sell policy benefit – which your partners would give to your family in exchange for their interest in the business – and your life insurance payout, your family will be able to grieve without worrying about money or the company.
How Do I Learn More?
To learn more about purchasing a buy-sell life insurance agreement, contact the Hometown Life Insurance experts at (unable to find number or site). Our licensed professionals will be happy to answer any questions you have.
