Implementing a Cross-Purchase Buy-Sell Agreement with Life Insurance

Understanding Cross-Purchase Buy-Sell Agreements

As a business owner, you are responsible for making sure that your company will continue to run smoothly even if something happens to you or one of your partners. One way to do this is by implementing a cross-purchase buy-sell agreement with life insurance.

What is a cross-purchase buy-sell agreement?

A cross-purchase buy-sell agreement is a legally binding contract that outlines what happens to a business if one of the owners dies, becomes disabled, retires, or leaves the company. In this agreement, the remaining owners agree to buy the departing owner’s share of the business at a predetermined price.

Why use life insurance?

Life insurance is often used in a cross-purchase buy-sell agreement because it provides the necessary funds to buy out the departing owner’s share. Instead of coming up with the money out-of-pocket or taking out a loan, the remaining owners can use the death benefit from the life insurance policy to buy the shares.

The benefits of a cross-purchase buy-sell agreement with life insurance

  • Ensures business continuity: With a buy-sell agreement in place, the remaining owners can continue to run the business without interference from the heirs or beneficiaries of the departing owner.
  • Tax advantages: Life insurance death benefits are generally tax-free, which means that the buyout won’t have a significant impact on the company’s finances
  • Protects the interests of all owners: Each owner is guaranteed a buyer for their share at a predetermined price, which protects their investment in the company.

Implementing a cross-purchase buy-sell agreement with life insurance

Before implementing a cross-purchase buy-sell agreement with life insurance, it’s essential to work with a financial professional to ensure that the agreement is legally binding and meets the needs of all involved parties. Here are the steps involved in implementing a cross-purchase buy-sell agreement:

  1. Identify all of the company’s owners and their percentage of ownership.
  2. Determine the value of the company and determine the price at which shares will be bought and sold in the event of a buyout.
  3. Choose a life insurance policy that will provide sufficient funds to cover the cost of the buyout.
  4. Each owner purchases a life insurance policy on the other owners, with each owner being both the insured and beneficiary of the other owners’ policies.
  5. The cross-purchase buy-sell agreement is drawn up and signed by all owners.

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If you’re interested in learning more about cross-purchase buy-sell agreements with life insurance, our team can help. Contact us today to get started.

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