Business Life Insurance 14 - What is Buy-sell Agreement ?
Buy-sell agreement is a legal contract drawn by the lawyer that indicates in detail of the parties to the agreement, an evaluation method of the business and method of payment for the following occurrences:
1. Death.
2. Disability.
3. Disillusionment.
4. Transfer of business interest at retirement.
Buy-sell agreements are used in any types of business including a sole proprietor or partnership. Since these types of business must legally close their doors when the owner or partner dies. The use of buy-sell agreements allow the business to continue while the new owner completes the transfer of ownership without going into debts.
Here are the buy-Sell agreement guarantee commitments:
1. Each party will transfer their interest to the surviving partner(s). This agreement will also bind their heirs and estate to the agreement.
2. Each party will pay the purchase price as indicated in the agreement.
3. All parties will buy and maintain sufficient life insurance to fund the agreement.
4. The procedure for the additional payment required if excess of the insurance proceeds.
5. The method of how dispersal of insurance proceeds in excess of the business interest.
6. The method of storing and maintenance of the funding life insurance policies.
7. The method of how dispersal of the survivor's policies after transfer of the business interest.
8. Each party agrees that the deceased's estate shall be held free and clear from liability to the business creditors after the transfer of business interest is completed.
Both parties must also agree to the method of funding this buy-sell agreement:
1. Life insurance
If life insurance is used to fund the buy-sell agreement then life insurance on the lives of all parties concerned needs to be applied for and put in place. The contract may be held as a legal document until needed.
If one of the parties is not insurable, joint life last to die on the lives of the partner and spouse may be a solution. The sum insured, paid out on the second death, would then fund the agreement.
2. Non-fund contract
Here are also some non-funded methods that can be used to pay out the survivors after death of one of the parties:
a) Borrow the Funds
Requires sufficient collateral and payback.
b) Bring in a New Investor
It is always difficult and may be costly to the heirs of the decreased partner
c) Set up Sinking Fund
It may be far more expensive than life insurance and adequate time to set it up may not be available.
d) Sell Company Assets to Pay Out Deceased's Estate
It is very counterproductive to the carrying on with business as usual.
f) Payment out of Profits
Payment is made out of the business interest, usually over a number of years. This can create a business risk and brings future uncertainty into the arrangement.
In fact, using life insurance to fund the buy-sell agreement is always the least expensive and most functional approach.
I hope this information will help. If you need more information of the above subject, please visit my home page at:
Kyle J. Norton
http://lifeanddisabitityinsuranceunderwriter.blogspot.com/
http://businessinsurance14.blogspot.com/
http://businessinsurance15.blogspot.com/
All rights reserved. Any reproducing of this article must have all the links intact.
Related Tags: insurance, business, life insurance, business insurance, insurance quote, insurance agency, life insured
I have been studying natural remedies for disease prevention for over 20 years and working as a financial consultant since 1990
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