If your company's buy sell agreement requires that the other owners or partners purchase a deceased or disabled owner's interests, buy sell life or disability insurance can be used to fund your buy sell agreement.
Provides a cash payment that other owners or partners can use to buy out a deceased or disabled owner’s share of the business
Policy may be owned by the business—or each owner can own a policy on each of the other owners
Prevents owners/partners from having to use personal funds or business assets to fund the agreement
Note: Your company must be a partnership or professional corporation that has been in business for at least three years and has a net worth of at least $50,000.
The information above is a summary only. Please see a sample policy for complete details on terms and conditions, including benefits and exclusions.
Find answers to your questions about buy sell insurance.
A buy sell agreement is a legally-binding contract or provision within a shareholder agreement, that stipulates, among other things, what will happen when one of the partners, shareholders or co-owners passes away, becomes permanently disabled or leaves the business. If the agreement calls for the other partners, shareholders or co-owners to purchase a deceased or disabled owner's interests they can fund the purchase with life or disability insurance.
If you own a business but do not actively manage it, you can help ensure its continuity after you have passed away by making it possible for your professional managers to take over your ownership. A simple way to do this is with a unilateral buy sell agreement, under which your managers agree to purchase your interests in the business when you pass away.
You can fund this agreement with a life insurance policy on yourself, naming the managers as beneficiaries. You will probably want the managers to own the policy—and perhaps pay the premiums, too. When you pass away, the managers could receive a tax-free benefit from the policy, enabling them to complete the purchase.
In this way, your family will also benefit because they will be assured of receiving payment for your interests in the business as quickly as possible.
If a buy sell agreement calls for the surviving partners, shareholders or co-owners to purchase the deceased owner's interests, they can fund the purchase with life insurance. Quite simply, the tax-free death benefit paid from the policy can be used for this purpose.
You can choose from several types of life insurance. If your business is likely to have a limited life span—say 10 or 20 years—or you plan to divest your interest in the business at retirement, you may find that term life insurance is attractive. It costs less than other forms of insurance and can be allowed to lapse when the business closes. Alternatively, if you foresee the business continuing to operate for a longer period of time, you may wish to choose a permanent life insurance policy. Permanent coverage such as universal life insurance, can be used if your business wants to lock in insurability and foresees other needs for insurance beyond the period that the buy sell agreement is needed. For example, you may want to fund the buy sell agreement up to retirement age but thereafter use the insurance for estate taxes.
Generally, the simplest solution is for the policy to be held by the other partners or shareholders, as they will receive the death benefit tax-free. This is referred to as a cross-purchase funding solution. Alternatively, the business can own the policy, in which case the tax-free life insurance proceeds will be paid into the company and the requirements of the buy sell agreement will be carried out as stipulated in the agreement.
Buy sell disability insurance is designed primarily for partnerships and professional corporations with two to five principals. Consideration may also be given to corporations and partnerships with six to ten principals. The policy is most effectively used with partnerships and closely held corporations that employ less than 50 people, have up to $10 million in annual sales and are in stable industries.
Businesses most likely to need this kind of coverage include:
The owner of the policy may either be the corporation or partnership (entity purchase), or alternatively each owner can own a policy on each of the other owners (cross-purchase). The entity purchase may be preferred when there are more than two owners involved as a means of reducing the number of issued policies. The existence of a formal disability buy sell agreement is very important, as it governs the terms of the buyout. The agreement is not required at time of issue but will be required at time of claim. Applicants applying for buy sell disability coverage should have some individual disability income protection coverage in force or should be in the process of applying for such coverage with RBC Insurance®.
The owners of the business should also be covered by buy sell life insurance to protect the business from an insured owner's death.
The buy sell disability policy offers coverage until:
Two payout options are available when the policy is purchased: