Business Uses of Life Insurance Flashcards
Business Uses of Life Insurance
Business uses of insurance often mirror individual needs – to cover the unexpected death of business partners, executives, and key employees by providing funds for the continuation of the business, not for the heirs of the decedent.
Business Uses of Life Insurance
Business uses of insurance often mirror individual needs – to cover the unexpected death of business partners, executives, and key employees by providing funds for the continuation of the business, not for the heirs of the decedent.
Buy-Sell Agreement
Buy-Sell Agreement
This agreement contractually establishes a price with the intent to purchase, at a predetermined value, the assets of a business should one of the contract participants predecease the others. It may be used with a sole proprietorship, a partnership, or with stockholders of a closed corporation.
Some of the advantages of having such an agreement:
It is legally enforceable
The value of the business is previously agreed upon
It is an immediate and automatic method of transferring the deceased’s interest
Buy-Sell Agreement
This agreement contractually establishes a price with the intent to purchase, at a predetermined value, the assets of a business should one of the contract participants predecease the others. It may be used with a sole proprietorship, a partnership, or with stockholders of a closed corporation.
Some of the advantages of having such an agreement:
It is legally enforceable
The value of the business is previously agreed upon
It is an immediate and automatic method of transferring the deceased’s interest
Some disadvantages of NOT having an agreement:
Income to surviving family members stops
Surviving business owners may suffer a loss of income
Asset reduction due to forced liquidation may occur
The estate transfer may be delayed due to forced business liquidation
Shares of ownership transfers to surviving relatives
Cross Purchase Plan
Used when the partners of a business purchase life insurance on each other. At the death of one of the partners, policy proceeds are used to purchase that person’s interest in the business from their heirs.
Entity Plan
Under this plan, a business entity enters into an agreement in which it is obligated to purchase the deceased owner’s interest. The entity typically buys life insurance policies on each of the owners. The entity would then name itself as the beneficiary of each policy. The death benefit of the policy would be equal to the pre-agreed upon purchase price, which would be spelled out in the buy-sell agreement.
Stock Redemption Agreement
An agreement between the shareholders and a close corporation (a corporation with a small number of shareholders). Each shareholder agrees to sell their shares upon death to the corporation according to the price, terms and circumstances specified in the agreement. This type of buyout is structured so the corporation buys the shares with corporate dollars.
Key Person (Key Employee)
Key persons are employees whose contributions have a significant impact on the revenue and profitability of the company, especially in small businesses.
The key employee contributes substantially to the success of a company. They are typically:
Part of the management team
More highly paid
Respected by customers, creditors, suppliers, and vendors
Have direct responsibilities for sales, production, or service
The life insurance proceeds from a key person life insurance policy provide the necessary funds to recruit, hire, and train a replacement employee, restore lost profits, and reassure customers that the business operations will continue. Either term or permanent coverage can be used to fund the plan.
