Buy/Sell Life Insurance
Life insurance is an ideal way to fund the buy-out of a business owner who dies. A legal document known as a Buy / Sell Agreement is drafted as either a cross-purchase agreement or an entity (stock redemption) agreement. In a cross-purchase agreement, the deceased owner's share in the Business is purchased by one or more parties directly from the owner's estate. The purchaser(s) may currently own an interest in the Business, or may become new owner(s) through this transaction.
The sale may be all cash, or involve some sort of installment sale, involving a note payable to the decedent's estate. If life insurance were taken out previously to fund all or part of the cost of transfer, these proceeds would reduce the cash requirements to the buyer(s), and result in more immediate cash to the estate of the decedent owner.
In the case of an entity, (stock redemption) arrangement, the deceased owner's interest in the Business is purchased directly by the company. Those shares then become treasury stock, increasing the percentage of outstanding shares for the other owner(s). Again, life insurance - this time owned by the Business on the life of the decedent, would reduce the cash drain on the company when redeeming the stock.
While the majority of life insurance purchased to fund both types of buy-outs is term insurance, there are compelling reasons to consider Indexed Universal Life (IUL) if the company or the individual buyer has a reasonable amount of investable cash. Using leverage, the allocation of some cash to such policies may result in tax-favored growth of the extra funds, and could also cause the potential death proceeds to increase over time, rather than stay constant as is the case with term insurance. Worse still for the term insurance option, the policy will expire at some point, requiring the insured to still be insurable, and to pay a much higher premium to renew.