A common business use of term life insurance has been the buy sell agreement. It’s especially useful in small businesses or partnerships where the death of one person can significantly affect the continuing functioning of the business at hand. Let’s look at the buy sell agreement and how affordable term life rates address the underlying insurance need in such as scenario.
Let’s face it…one of the few ways to get ahead in the U.S. is to start your own small business. The average size of companies in the U.S. is between 3-5 people. The big headlines may be for large corporations (and recently, their layoffs) but the engine of this country is small business. The two or three person corporation, partnership, or LLC is very common especially for younger companies. In such a company, each partner typically has to wear many hats and the the loss of any partner would significantly affect the ability of the company to remain an ongoing concern. There’s also the contractual obligations and contracts that bind the partners together in the first place. What happens if one partner passes away.
This is where buy sell comes into play. Essentially a buy sell agreement is between the partners or owners of the company. It states that if one person passes away, the other person will buy out their stake in the company. Since this can be large sums of money, the best way to do this is with life insurance. Term life insurance is so inexpensive that it provides a simple and effective means to providing the cash needed so that the surviving partner can buy out the deceased partner’s share of the company. In this case, the beneficiary of the term life policy would be the other partner. It’s important with life insurance to have an insurable interest. This means that you have some vested interest in another person. The partnership or company ownership establishes this interest.
The reason for a buy-sell is pretty obvious. Let’s take an example. Let’s say that two partners have opened a company together. It’s a straight partnership with 50/50 ownership. They both put in $75K each to start the company which was a large investment for both individuals. The unforeseen happens and one partner passes away. Now what? Most partnership contracts and/or incorporation papers deal with what happens when one partner no longer wants to participate or passes away. It usually involves the other partner(s) “buying out” the shares of the leaving or deceased partner. At a minimum, the surviving partner above must now come up with another $75K. He/she may not have this amount or coming up with this amount of money suddenly will put a severe financial burden on him/her. Or worse yet, what if the person cannot come up with the $75K? There may be surviving family members who require that the contract be fulfilled and the deceased partner’s share be purchased with the money going to the surviving family or the deceased’s estate.
It’s best to avoid these issues altogether with a simple buy sell agreement based on term life insurance. Term is cheap life insurance so it makes it very easy to these issues. You can look at term life insurance on an individual basis and even as a small group (business term life insurance). The latter may offer better rates and more flexible underwriting requirements. We would be happy to run both options to see what makes the most sense. You can request this service with our fast life insurance quote form.