It is important to choose the right buy-sell life insurance product for your client. Doing so ensures the orderly transfer of an ongoing business, creates a price that will be there when needed, continues a business for the employees as well as the surviving owners, and allows the deceased’s family to reap the value that the deceased owner developed over a lifetime.
Standard buy-sell life insurance products make the difference between good planning and no planning. There are certain prospects and clients who benefit from them and those who don’t. From the sole business owner to two partners or even a corporation, the area of business succession is of utmost importance.
· Sole owner buy-sell life insurance is binding on both parties; it contains the “right of first refusal;” it can even use the revenue rule 1066 which provides for an installment sale which may be useful if the agreement had not been updated. The key is to find a willing buyer to ease the transition for the deceased heirs.
· Cross purchase buy-sell life insurance obligates each business owner to buy part of a deceased owner’s business interest. It’s also binding on both parties and assures that there is a market for the business and appropriate value for the heirs. Each owner purchases a life insurance policy covering the life of every other business owner, added together the sum should equal the value of the business. Policies are owned by deceased associates.
· Entity purchase buy-sell life insurance obligates a purchase and a sale, except this time the business is going to redeem from the heirs or the estate. Policies are owned by the business with the business being the beneficiary. This is ideal for many owners or members.
· Wait-and-see buy-sell life insurance defers the choice to after a death. It allows for the corporation to have the first option to purchase the stock for the price or formula set in the agreement.
A valid buy-sell agreement is a must for all ongoing business concerns. The ease of transition at the death of an owner and the knowledge that the heirs will receive an equitable amount for the deceased ownership will allow for peace of mind all around.
