Business Buy Sell or Cross Purchase: Which One is Right for Protecting Your Business?
In many ways, the life insurance needs of a business can be similar to those of individuals and families. In fact, what many business owners may not realize is that good solid life insurance planning can play a major role in the overall financial stability of the business itself.
Why is that?
Should the unexpected occur, the life insurance policy proceeds can actually protect the company against the loss of the owner, partner, or key executive – and these funds can essentially keep the business operating until either the company is sold or a suitable replacement can be located.
Business Life Insurance Strategies
There are various strategies that can be used with business owners and key personnel in order to help in protecting the company in case of the unexpected. Your goals for the company’s succession will typically dictate which of these methods you use.
Buy / Sell Agreements
A buy sell agreement is a life insurance contract between two or more owners or partners in a business. When there are two or more owners or partners, the sudden passing away of one of them could literally devastate the business going forward. Therefore, business owners can set up a buy / sell agreement where each owner or partner obtains a life insurance plan on the other(s).
If an owner or partner of the company passes away, then the funds from the life insurance can offer the necessary funding for the other owners or partners to purchase the deceased owner or partner’s portion of the business. These funds can also allow the business to survive and continue its operation throughout this time of the transition.
Buy sell agreements can also help the family and other survivors of the deceased business owner or key executive. This is because they are assured that the funds will be there for the other owners to purchase the business.
These funds can be paid to the deceased owner’s survivors to be used for the payment of final expenses, as well as for the survivors’ living expenses since they no longer have the deceased’s income from the company.
Cross Purchase Agreements
A cross purchase agreement is actually a type of buy sell agreement. These agreements are oftentimes used when there are two or more partners in a company. A cross purchase agreement is set up so that each of the partners or business owners will own a life insurance policy on the other owners or partners in the company.
Likewise, each of the owners or partners will also be named the beneficiary of the policies that are purchased. In this case, the actual company or corporation will not be named as a participant in the agreement.
When setting up a cross purchase agreement, the partners will pay the policy premiums, and they will also have beneficiary designations in direct proportion to each of their shares of the purchase price of the company that is set in the buy sell agreement.
There are some important factors to consider when purchasing life insurance in a business situation. For example, in most cases, the policies should be permanent as versus term. This is because permanent life insurance will not require the insured to have to re-qualify for coverage after a certain period of time.
Also, the life insurance policies should ideally include an option to increase the amount of coverage in the future. This can help in providing additional funds if the value of the company increases over time.
When purchasing life insurance for your business, working with an independent agent will be your best option. This is because you won’t be locked in to just one insurance carrier’s rates and underwriting criteria.
We work with over 40 different insurance companies – and because of that, we can help you to find the very best coverage, benefits, and premium rates. Contact us today for the coverage you need to keep your business in tact – even if the unexpected should occur.