Buy Sell Agreements: 3 Reasons You Should Consider Life Insurance


– Let’s talk about the top three reasons that you should consider a
buy-sell agreement funded with life insurance. Now, first of all, you might be wondering, what is a buy-sell agreement exactly? Well, here’s what it is. When you’re in business
with business partners, whether one or multiple, you are in a position where
your livelihood is contingent upon those business owners
continuing in the business. I mean, think about it. You’ve all brought your
intellectual capital, you all have your specific
role in the business and as a cohesive team or a unit, you’re collectively moving forward. But what about when one
business owner wants out or has to meet or has to
move out of the business? Each of you is going to exit
the business at some point, it’s either gonna be
voluntary or involuntary. And what you wanna think
about is how do you have that business continue on so you can keep delivering
the value to your customers so you can keep the employment agreements with your employees, so that you can fulfill your obligations, and even more importantly, you’re in a position where
the business can continue to thrive and flourish, and you then get to reap the rewards of that in your family’s financial life. But now what about when one of the business partners does leave. This could be due to retirement, or it could be to something
like disability or death, could be because of a
divorce in their family, or it could be something
like mental incapacity. When you think about all of the reasons why they may be forced
to or choose voluntarily to leave the business, you
wanna be able to plan in advance for that orderly transfer of
the business ownership itself. Here’s what I mean by that. If you’re in a position where you and your business partner are
moving forward in business and something happens to them, you wanna be in a position where you then maintain the
full ownership of the business. But how is that actually gonna happen? Well, first you need to have
a legal agreement in place where you and the business
partner both have agreed upon a value of the business, what your portion of ownership
is worth and what theirs is. So say it’s a million dollar business and you have a 50, 50% ownership. So you each own half,
that means your shares or your stock in the
business is worth $500,000, and so is theirs. Now if they pass away, and you want to maintain the business, think about their family for a minute. They’re in a position
where their livelihood has also been contingent on the business. So now they have this business, and they may not want to
continue operating it, or it might not be
financially feasible for them to continue owning the business asset, they might want cash instead. So how do you make sure that both parties and their estate and their families and their heirs are taken
care of no matter what. What you need to have
in place is an agreement that not only establishes how the transfer of ownership will happen, but also a funding source to make sure that the remaining party
can buy out the other one. So that first reason to have
a buy-sell agreement funded with life insurance is
for the orderly transfer of business ownership if something happens to one of your business partners. Now, the second reason
is that life insurance is the most certain and economical means of
providing the funding for buy-sell agreement. And here’s what I mean by that. If you’re in a position where now you want to buy out the shares
from your business owner that’s passed away, and that’s $500,000, you need
to come up with that capital to be able to make that purchase. Otherwise, they’re gonna
maintain their half of the business ownership and
you’re probably gonna end up in business with their spouse. The spouse might not wanna
be in business with you, and you may not wanna be
in business with them. So let’s figure out how
to get the cash to them. I have to be in a position
where I can pay that $500,000 to my business partner’s estate. So how can we do that? Well, I could have cash
reserves, and I could make sure that I have $500,000 of cash
sitting in my bank account so that I could buy them out
at any point if the need arose. But what if I wanted to do
something else with that 500,000 and didn’t just want it sitting there for the case of when
that event might arise? I could also have a sinking fund where I’m putting money
aside on an ongoing basis. And I’m hoping that grows large enough to provide that $500,000 to buy them out. But again, we cannot plan
for these type of events, and we don’t know when it’s gonna happen. So because of that, I may
not have sufficient funds in that sinking fund at the time of need. Now you could rely on a bank loan, but you’re not sure if
your credit worthiness might actually be impacted due to your income coming from the business, and that being less certain
in that volatile time. And another method would be
looking at installment payments, where I would say, “Well, the business is
gonna pay overtime monthly “or annually to my
business partner’s estate.” But in that case, I don’t
know about the sustainability of the business and I
really wanna make sure I don’t put my business in a position of having a financial
obligation that I can’t meet. Here’s where life insurance
really fills a need perfectly. It’s the most economical and certain way of knowing that if that needs should arise I will have the funds to buy them out. And here’s why. There’s multiple ways of
setting up a buy-sell agreement with life insurance, but
let’s just say that we each, myself and my business partner
had life insurance policies on each other. That means that I own a policy on him, he owns a policy on me. Therefore, what happens
is, if he passes away, I am going to get the death
benefit from his policy. Now, if I set the policies up so that it’s a $500,000 death benefit, because that was the
value of their ownership, then I automatically know that even if the event happens in
six months or in 20 years, if that policy is a permanent policy, I know that when ever
that life event occurs, I will have the funds to buy them out, no matter how long of time has elapsed, or no matter how much I’ve paid in. Now ultimately the third reason to have a buy-sell agreement
funded with life insurance is really simply for the peace of mind. Now, this is a peace of mind component that no matter what happens, I have the financial means to
buy out my business partner. And here’s something else to think about. Life Insurance is extremely
flexible, is versatile, and it can accommodate
multiple life scenarios. So the same life insurance
policy that possibly is part of a buy-sell agreement
might also be able to be used as a key man insurance
policy on each of us. It also might be able to be a permanent life insurance policy that I use with infinite banking, meaning that I’m building
up this cash reserve that I can use as an
emergency an opportunity fund. And think about this. What if they leave due to
retirement, not due to death? That would be an ideal situation right? Now what if the policy that
I own on my business partner, I’m able to transfer ownership
and now he can walk away with his life insurance
policy in the cash value that’s built up inside of that? Maybe that can be part
of the purchase price so that he can retire and
get what’s a reasonable and fair price for his
contribution to the business. Now certainly life insurance is not gonna be a one size fits all. And it may not even be
the only funding source for buy-sell agreement,
but it’s really critical to think in advance the long
game, the long term strategy for what your exit plan
is in your business because the further out you plan, the better decisions you’re
gonna be able to make because the more options you have. So those are the top three reasons why you should consider a
buy-sell agreement funded with life insurance. It provides the orderly transfer of value. It’s the most certain and economical means of providing the funding to
buy out your business partner, if that event ought to arise, and it provides tremendous peace of mind. Hey, I hope you liked this video. If you did, click the link
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