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LIFE POLICIES
Types
Term vs. Whole
Individual
Business
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LIFE POLICIES ~ BUSINESS
The need for business insurance arises because the death of people who are vital to the operation of a business can have far reaching effects, including the death of the business itself.
The Buy/Sell Agreement funded with life insurance
Buy/sell agreements funded with life insurance become an immediate source of money for a surviving business partner to buy the deceased person's business interest. Life insurance policies used in this way are also generally called business continuation insurance. The use of life insurance in this manner helps the business to continue as usual.
With a "partnership buy/sell agreement" any surviving partners will purchase the portion of a business owned by a deceased partner. The agreement includes the purchase price of the deceased person's interest in the business. The agreement should include a guarantee to ensure money is available at the time of loss. Life insurance is the perfect method to guarantee availability of the money.
Cross-Purchase Agreements with Life Insurance
With the use of a "cross purchase buy-sell agreement" each partner purchases a separate life insurance policy on every other partner's life equal to the amount needed to buy a share of the partner's interest at death. In a three-partner arrangement each partner would buy two life insurance policies covering each of the other two partners. In this manner each surviving individual partner would use the proceeds to purchase the deceased partners business interest.
Entity Purchase Agreements with Life Insurance
With the use of an "entity purchase buy/sell agreement" the business owns the life insurance policy on each partner. So, in contrast to the "cross purchase buy-sell agreement", where it would take six life insurance policies to cover the three partners, the "entity purchase buy-sell agreement" would only require three life insurance policies. The business would own the policies instead of the partners, thus at the time of death of a partner the business (entity) would pay the proceeds to the deceased heirs instead of the individual partners.
Corporate Stock Redemption with Life insurance
Closely held corporations are much like partnerships. They have stockholders rather than partners. With a closely held corporation, the stock is held by a select group rather than being made available to the public. In this case, the corporation would purchase the life insurance policies on the lives of the stockholders and own the policies. At the time of death of a stockholder, the corporation would receive the insurance policy proceeds and the use these proceeds to purchase the stock from the deceased heirs.
Key Employee Life Insurance
Business related life insurance can be written on the life of a key employee who is vital to the successful operation of a business. A key employee might be one of the owners, but it could be a non-owner employee who is unique to the company. This person is vital to the company and the company would suffer by the loss of this person. Key employee insurance requires a life insurance policy that names the employee as the insured and the business as the policy owner and beneficiary. The business pays the policy premium and receives the death benefit if the employee dies.
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