Life Insurance and Other Asset-Transfer Vehicles

Nine out of 10 U.S. businesses are family owned, but seven out of 10 won’t survive to the next generation. The chief culprit? A majority of business owners don’t have a plan in place to control what will happen when they leave the business. The fact is, all small businesses must face changes in ownership and leadership at some point. How well prepared the business is for that eventuality may very well dictate whether it survives the change.

Basics of Buy-Sell Agreements

A buy-sell agreement can predetermine buyout procedures in the event of death, disputes, financial difficulties, or even the planned departure of a business owner.

When and Why

Many business owners are so focused on the company’s day-to-day needs that they forego planning for the future. But consider what might happen to a business if one of these events took place:

• An owner dies or becomes unable to work, and has family members who depend on the business for income.
• An outside party offers to buy one partner’s interest.
• A partner goes through a divorce and the ex-spouse stands to receive a share of ownership.
• An owner files for personal bankruptcy.

For the unprepared, each of these events can trigger unpleasant consequences. Or they can trigger a buy-sell agreement, which can help protect heirs or partners and potentially keep the business moving forward.

Agreement Funding with Life Insurance

Funding a buy-sell agreement can be accomplished in several ways. Some businesses may be able to carry on with cash reserves. But it can be challenging to tuck away significant sums in case of a disaster that may never occur. Borrowing money and/or making installment payments after the triggering event are other options, but many businesses might not be able to endure that kind of financial burden and still operate efficiently.

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The death benefit from a life insurance policy can help provide sufficient cash in the event that one owner dies unexpectedly. As long as the premiums are up-to-date and there are no outstanding loans, you can count on the face value of the policy. If the business faces other circumstances that require a buyout, the potential cash value of the policy can be tapped as well.

Building a successful business is a long, difficult process. If major changes occur, a buy-sell agreement can help facilitate the transfer of ownership and compensate all parties fairly for their interest in the business.

Remember, the cost and availability of life insurance depends on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it is prudent to make sure that you are insurable by having the policy approved. The guarantees provided by the insurance company are contingent on the claims-paying ability of the issuing company.