Life insurance is designed to help protect a household from the financial hardships that may follow the untimely death of a primary wage earner.
But how will a death affect a small business?
One way of safeguarding a business is to create a buy-sell agreement. A buy-sell agreement is a contract between different entities within a corporation to buy out the interests of a deceased or disabled member. A buy-sell agreement also can protect the business from loss of revenue and cover the expense of finding and training a replacement.
Types of Buy-Sell Agreements
There are two main types of buy-sell agreements commonly used by businesses:
Cross-Purchase Agreement. In a cross-purchase agreement, key employees have the opportunity to buy the ownership interest of a deceased or disabled key employee. Each key employee takes out a policy on each of the other key employees. Cross-purchase agreements tend to be used in smaller companies where there are not too many key employees to cover.
Stock-Redemption Agreement. Stock-redemption agreements are formal agreements between each of the key employees—and the business itself—under which the business agrees to purchase the stock of deceased key employees. Key employees agree to sell their shares to the company, often in exchange for a cash value.
These agreements establish a market value for a key employee’s share of the company.
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Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Independent Advisor Alliance, a registered investment advisor. Rutledge Financial Partners, LLC and Independent Advisor Alliance are separate entities from LPL Financial.