Buy – Sell Agreement
A buy–sell agreement is a legally binding agreement between the co-owners of a business. It is sometimes referred to as a buyout agreement. A buy-sell agreement governs the situation if a co-owner dies, is forced to leave the business, or simply chooses to leave the business.
A buy-sell agreement is a formalized business continuation plan that is designed to provide for the orderly disposition or continuation of an individual’s ownership in a business. … Protect the surviving owners from gaining an undesirable co-owner (such as a member of the deceased interest holder’s family).
Naming the buyer as the beneficiary to the insurance policy being used to fund the buy-sell agreement is considered the “classic” approach. The buyer under an entity purchase agreement or stock redemption would be the business itself. Under a cross purchase agreement or a one-way buy-sell, the buyer is an individual.
CONSEQUENCES OF NOT HAVING A PLAN
- Failure or liquidation of the business in the event of death or sudden incapacity of the business owner, partner, or key employee.
- Unqualified and inexperienced heirs running the business.
- Loss of income stream to remaining family members.
- Unwanted litigation expenses due to disagreements among heirs and family members.
- The overall value of the business may be less when the heirs ultimately decide to sell.
PROPER PLAN INCLUDES
Types of Buy Sell Agreements:
Key Person Coverage
The business is the beneficiary under the policy. Here’s how key person insurance works: A company purchases a life insurance policy on its key employee(s), pays the premiums and is the beneficiary of the policy. If that person unexpectedly dies, the company receives the insurance payoff.
Key Person Insurance, also known as key employee insurance, is coverage that protects your small business in case of an untimely death of the business owner or top-performing employee. The life insurance proceeds could be used to help offset the financial loss that may occur in the event of the death of a key employee.
A business exchange rider allows the business to substitute a new key person for the key person identified in the insurance policy. There may be a change in premiums, coverage level, and the cash value of the policy (if it’s permanent life insurance).
Disability Protection
Disability Insurance, often called DI or disability income insurance, or income protection, is a form of insurance that insures the beneficiary’s earned income against the risk that a disability creates a barrier for a worker to complete the core functions of their work.
Disability insurance is intended to replace some of a working person’s income when a disability prevents them from working. It does not: Cover medical care or long-term care services. Provide benefits. once you are over age 65—when you are most likely to need long-term care services.
The ADA defines an “individual with a disability” as a person who has a physical or mental impairment that substantially limits one or more major life activities, has a record of such an impairment, or is regarded as having such an impairment.