What is buy-sell life insurance and why is it important?
Buy-sell life insurance is ANY life insurance policy used to fund a buyout obligated to occur under a buy-sell agreement. A buy-sell agreement is mainly to ensure that when one business owner dies, the remaining owner (or owners) are not forced to be “in business” with the heirs of the deceased owner.
There are many ways to structure the ownership of these policies which is determined by the particular buy-sell situation being addressed. The main determinate of the ownership structure is the number of people who need insurance coverage.
The typical insurance used to fund a buy-sell are:
1. Term insurance: using a period-level term policy with the number of years determined by the length of the buy-sell agreement.
2. Return-of-premium term insurance: Essentially the same product as the period-level term with an additional premium collected during the policy period. If the policy is kept until the end of the period, the insurance company will refund all premiums made.
3. Permanent insurance: I prefer using equity-index universal life as I feel it is the best consumer-oriented product, but other Agents may prefer a different product.
Why is buy-sell insurance important? If a buy-out is obligated under a buy-sell agreement and there is no funding, this additional financial strain on a business (at the same time as the company is dealing with the loss of one of its owners) can be difficult to survive. Both the heirs of the deceased owner lose as does the surviving owner who’s business may collapse under the additional financial strain.
Bottom line, find an Agent you trust and have them run the various illustrations for you so you can get an idea of the relative costs of each type of coverage.
I hope this helps. I would be happy to answer any follow up questions you may have regarding buy-sell insurance.
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