How to Fund Your Buy-Sell Agreement with Term Life Insurance
If you are a business owner, it is important for you to plan for the unexpected. One of the ways you can do this is by creating a buy-sell agreement with your business partners. This agreement outlines what will happen to your business if one of the partners dies or becomes disabled. However, it is not enough to simply have a buy-sell agreement. You also need to consider how you will fund it. One option is to use term life insurance. In this article, we will discuss how to fund your buy-sell agreement with term life insurance.
What is a Buy-Sell Agreement?
A buy-sell agreement is a legal agreement that outlines what will happen to a business if one of the partners dies or becomes disabled. The agreement will typically specify who will buy the departing partner’s share of the business and at what price. The remaining partners will usually purchase life insurance policies on each other to ensure that there is enough money to buy out the departing partner’s share.
Why Use Term Life Insurance?
Term life insurance is often used to fund buy-sell agreements because it is relatively inexpensive compared to permanent life insurance policies. Term life insurance policies provide coverage for a specific period of time and have a fixed premium. This makes them an affordable option for many business owners.
The Steps to Fund Your Buy-Sell Agreement with Term Life Insurance
Here are the steps to fund your buy-sell agreement with term life insurance:
- Decide on the Type of Term Life Insurance. You will need to decide on the type of term life insurance that you want to use to fund your buy-sell agreement. This will depend on your specific needs and financial situation. You can choose from level term, decreasing term or increasing term insurance.
- Determine the Coverage Amount. You will need to determine how much coverage you need for your buy-sell agreement. The coverage amount should be enough to cover the buyout of a partner’s share of the business.
- Calculate the Premiums. Once you have determined the coverage amount and type of term life insurance, you will need to calculate the premiums. The premiums will be based on each partner’s age, health status, and coverage amount.
- Choose the Beneficiary. You will need to determine who the beneficiary will be on the life insurance policy. In most cases, the beneficiary will be the remaining business partners.
- Implement the Plan. Once you have decided on the type of term life insurance, coverage amount, and premiums, you will need to implement the plan. Each partner will need to purchase a term life insurance policy on the other partners.
Conclusion
A buy-sell agreement is an important tool for business owners to plan for the unexpected. However, it is not enough to simply have a buy-sell agreement. You also need to consider how you will fund it. Using term life insurance is a cost-effective way to ensure that there is enough money to buy out a departing partner’s share of the business. If you need help funding your buy-sell agreement with term life insurance, contact our team today.
Call to Action
Ready to learn more about how to fund your buy-sell agreement with term life insurance? Contact our team today at https://bankownedlifeinsurance.org/contact-us/.