Business Life Insurance Services
Hospitality Insurance Agency also offers various busines-related life insurance products including Buy Sell Insurance and Key Man Insurance.
What is Buy Sell Insurance?
Within a closely held corporation, shareholders are often concerned about what might occur if one of the owners dies. Will the deceased shareholder’s family retain the economic value of the corporate interest? Can the surviving owners avoid interference from the deceased shareholder’s family? Will the survivors have the economic resources to redeem the deceased owner’s interest? Given these concerns, corporate owners are best served by entering into a buy sell agreement while they are all alive.
There are two basic types of agreements.
- With a cross purchase agreement, each owner of the corporation purchases an insurance policy on the other shareholders. The purchaser is both owner and beneficiary of the policies. Upon the death of a shareholder, the other shareholders are then able to use the life insurance proceeds to purchase the deceased owner’s shares.
- Another commonly used type of agreement is a stock redemption agreement, in which the corporation owns policies on the lives of the shareholders. When a shareholder dies, the corporation buys the deceased shareholder’s interest in the company with the insurance proceeds.
A buy sell agreement is made up of several clauses in your written partnership agreement that control various business decisions such as:
- the agreement states who can buy a departing partner’s share of the business, this can include outsiders or it can be limited to other partners
- the agreement states what events will trigger a buyout
- the agreement will dictate what price will be paid for a partner’s share in the partnership.
A buy sell agreement will instruct the partners how you have agreed to handle the sale or buyback of an ownership interest when one partner’s circumstances change. The events that can trigger a buyout of a partner’s interest under a buy sell agreement are:
- an attractive offer from an outsider to purchase a partner’s share in the company
- a divorce settlement in which a partner’s ex-spouse stands to receive an ownership interest in the company
- the foreclosure of a debt secured by an ownership interest
- the personal bankruptcy of a partner
- the death, or incapacity of a partner
What is Key Man Insurance?
A company purchases a life insurance policy on the key employee, pays the premiums and is the beneficiary of the policy. If that person dies, the company receives the insurance payoff. The reason this coverage is important is because the death of a key person in a small company can cause the death of that company. The purpose of Key Man life insurance is to help the company survive the blow of losing the person who makes the business work. The company can use the insurance proceeds for expenses until it can find a replacement person, or pay off debts, distribute money to investors, pay severance to employees and close the business down in an uninterrupted manner. Key Man life insurance gives the company some options other than immediate failure.
Key Man life insurance provides immediate cash to help a business survive the loss. Key person insurance policies can be purchased for a specific period of time, typically for 10, 15, 20 or 30 year periods, or for life.
Key Person insurance policies purchased for life often have cash values that can be used to supplement retirement programs for key employees or to reimburse the company for the cost of this protection following a key person’s retirement.