Buy-Sell Agreements Using Life Insurance

Many successful partnerships and members of close corporations have formal buy-sell agreements using life insurance to divide the business shares in a few quaffing events like the death of a partner.

The buy-sell agreement requires a members sell their shares according to a predetermined formula to the company or the remaining members of the business.

A buy-sell agreement using life insurance will be funded by using life insurance policy.

The death benefits from the life insurance policy are used to buy out the deceased partner’s or member’s interest in the business. This will allow the remaining partner’s or member’s the opportunity to buy out the heirs of the deceased partner or member.

In the event of death, the deceased partner’s heirs are required to relinquish control to the surviving partners in accordance with the terms of the buy-sell agreement. Before the interest of a deceased partner can be sold to the company or remaining partners, the deceased’s estate must agree to sell.

A big advantage of funding a buy-sell agreement using life insurance is that there is no burden on the surviving partner to sell company assets in order to raise the cash.

Life insurance proceeds provide instant cash benefits to the business and surviving partners are able to continue normal operations without having to deal with family members.

Is life insurance tax deductible, if you purchase life insurance policies for your partners? Yes, you can usually deduct the life insurance premiums you pay as business expenses.

Life insurance premium tax deductible expenses should be claimed as a business expense and also listed on your Schedule C.

Life insurance death benefits are paid to beneficiaries and are free from federal income taxes, as compared to a direct payment by the surviving partner.

Buy-Sell Agreements using Life Insurance

 Business Partnership Buy-Sell Agreement

John and Tom have a successful two person partnership, with a current business valuation of $2,000,000.

  • To assure the continued success of the company, a separate life insurance policy is purchased for each partner’s share based on the value of the business.
  • In a business worth $2,000,000 with two partners, each life insurance policy would be for $1,000,000.
  • The beneficiaries of the insurance would be each partner’s heirs.
  • In the event of the death of a partner, the buy-sell agreement is activated and the $1,000,000 insurance policy is used to buy out the deceased partner’s share.

Qualify for Buy-Sell Life InsuranceHow to Qualify for Buy-Sell Life Insurance

The biggest challenge to funding a buy-sell agreement with life insurance is that frequently there’s a difference in the health and age of the partners. Partners that are older or in average health will pay higher premiums, compared to the younger healthier partner.

Getting life insurance for senior partners usually takes a bit more time and patience.

It is very important to work with an agency capable of handling large life insurance polices and variety of health issues to make the buy-sell agreement mutually viable.

Many agents will give you prices based on very little personal information. These premiums are the cheapest available and are only accurate for individuals in perfect health. Your actual price is based on many personal factors like medical background and family history.

Both partners covered in the buy-sell agreement will be required to provide their medical history to a nurse when she comes out to do an insurance examination. The results of your medical exam are then forwarded to the home office for review by the company’s underwriters.

The underwriting time varies depending on the agent processing the application, and if your doctors records are requested by the underwriter.

Remember, that life  insurance companies often verify your medical history by ordering  medical records. If medical records are needed form your doctor the normal time is 2-3 weeks from the time you take your examination.

The results of the medical testing can also be used concurrently with business owners needing an additional policy for Key Person coverage.

 Buy-Sell Agreements

Types of Policies for Buy-Sell Agreements

Buy-Sell Agreements can be funded with either term or permanent life insurance.The life insurance premiums will become an ongoing business expense and will need to be paid each year to maintain the policies.

Term life insurance offers the advantage of lower premiums for funding a buy-sell agreement for a specified period of time frame. An ideal use for term coverage would be for an older partner who plans on retiring within the term of a policy.

Great rates can be found for term life with companies like Banner Life Insurance, Protective Life, and American General. Normally, Banner Life comes up with excellent prices for applicants taking a few medications or having a few minor health issues.

Permanent life insurance has a higher in cost but has the advantage of accumulating cash values. This policy may be appropriate for younger partners because the accumulated cash value may also be used to fund a future buyout of a partner.

Companies which offer liberal underwriting and also offer great rates for permanent coverage include carriers like North American Life, Midland, and Protective Life.

There are many scenarios which can come into play when selecting the best policy to fit your business. Our goal is to find a viable option on the insurance related component of the buy-sell agreement. To learn more about buy-sell agreements using life insurance, please give us a call, 1-877-249-1358.

Eric Van Haaften, LUTCF is the president of Affordable Life USA. We are a nationally licensed life insurance agency focused on finding our clients custom planning solutions at excellent prices. 1-877-249-1358. eric@affordablelifeusa.com