As a business owner, you need to plan for the unexpected. One way to do that is with a buy-sell agreement. A buy-sell agreement is a contract between business owners that outlines what happens to the business if one of the owners dies, becomes disabled, or leaves the business. One important consideration in a buy-sell agreement is the type of life insurance to use to fund it. In this article, we’ll compare and contrast term life insurance and permanent life insurance and explore the pros and cons of using each type in a buy-sell agreement.
Term Life Insurance
Term life insurance is a type of life insurance that provides coverage for a specific period of time, typically 10, 20, or 30 years. Term life insurance is often the least expensive type of life insurance, making it an attractive option for businesses that want to keep costs low. However, term life insurance has some drawbacks when it comes to buy-sell agreements.
- Low cost
- Simple and easy to understand
- Provides coverage for a specific period of time
- Expires at the end of the term
- May become unaffordable or unavailable to renew at the end of the term if the insured’s health has declined
- If the insured dies after the term expires, the buy-sell agreement may not be fully funded
Permanent Life Insurance
Permanent life insurance is a type of life insurance that provides coverage for the entire lifetime of the insured, as long as the premiums are paid. It includes two main types: whole life insurance and universal life insurance. Permanent life insurance is typically more expensive than term life insurance but has some advantages when it comes to buy-sell agreements.
- Coverage for the lifetime of the insured
- Cash value accumulation that can be used for future premiums or other needs
- Can be structured to pay dividends, which can be used to fund a buy-sell agreement
- Higher cost than term life insurance
- More complicated than term life insurance, making it harder to understand
- May require ongoing monitoring and adjustments to ensure the buy-sell agreement remains fully funded
When choosing between term life insurance and permanent life insurance in a buy-sell agreement, there is no one-size-fits-all answer. It ultimately depends on the unique needs of your business. While term life insurance may seem like the most affordable and straightforward option, it may not fully fund the buy-sell agreement if the insured dies after the term has expired. On the other hand, permanent life insurance provides lifetime coverage and can accumulate cash value, but it may be more expensive and complicated. Contact our team to learn more and discuss which option may be best for your business.
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