Buy-sell agreements are one of the most essential contracts between co-owners of a company.
The point of a buy-sell agreement is to protect the company and the remaining co-owner (or co-owners) if one partner dies, by keeping the ownership in the company and/or in the remaining owners’ hands.
There are three main types of buy-sell agreements, and they all depend on life insurance cover to ensure the funds become available to see the agreements through. This is done through life insurance policies called buy-sell policies.
The 3 types of buy-sell agreement – and how they are underpinned by life insurance policies:
- The Cross-Purchase Buy-Sell Agreement: the remaining partners agree to purchase the deceased or departing co-owner’s shares. In the case of death, the funds to do so are supplied by the life insurance payout from the deceased. The deceased would have made each co-owner a beneficiary for this purpose. The amount they receive would be exact – as per a price agreed on, in the buy-sell agreement. The payout would be a lump sum.
- The Redemption Buy-Sell Agreement: the beneficiary of the life insurance payout for the amount agreed on in the buy-sell agreement is the company. The company is then awarded the exact funds require to purchase the shares.
- The Hybrid Buy-Sell Agreement: is a combination of the above two types of buy-sell agreement. The life insurance policies involved would pay out to the company and the remaining co-owner(s)
There are several types of buy-sell life insurance policies. As life cover aimed specifically at buy-sell agreements, they can be tailor-made to suit your company. As companies change it is worth noting that a yearly business valuation will assist in keeping your insurance policies in sync with the company growth.
Buy-sell life insurance policies don’t just protect and benefit the company and it’s owners, but also the family of the deceased. Buy-sell life cover ensures they get fair compensation for the shares they would otherwise have inherited.
TAT offers Financial Services to small and medium sized companies ensuring the future of your company is secure and protected for the future.
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