How insurance funds a buy-sell agreement
A buy-sell agreement says what happens to an owner's share when they leave. Insurance is how that promise gets funded, so the remaining owners are not forced to find cash.
A buy-sell agreement sets the terms for transferring an owner's interest on death, disability, or exit. Life and disability insurance is commonly used to fund it, providing the cash to buy the departing owner's share so the remaining owners are not forced to sell assets or take on debt.
Why funding is the part that fails
Plenty of businesses have a signed buy-sell and no money behind it. When an owner dies or is disabled, an unfunded agreement becomes a cash-flow crisis. Insurance turns the promise into a funded obligation.
Common structures
The right structure is a legal and tax question for your attorney and CPA; the insurance simply has to match it.
- Cross-purchase, where owners insure each other
- Entity-purchase (redemption), where the company owns the policies
- Hybrid structures for more than a few owners
- Disability buy-out coverage, not just life
Common questions
Does the agreement or the insurance come first?
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