Which Two Insurance Products Are Commonly Used to Fund Buy Sell Agreements

As a small business owner, you have to think about the future of your business. What if something happens to you or your business partner? What if one of you passes away or becomes unable to work? It`s important to plan for these scenarios with a buy-sell agreement.

A buy-sell agreement is a legal agreement between business owners that outlines what will happen to the business if one owner leaves or dies. It sets up a plan for how the business will be sold or transferred to the remaining owner(s) or to a new owner. One of the key components of a buy-sell agreement is the funding mechanism, which is used to raise the money necessary to buy out the departing owner`s share of the business.

There are two commonly used insurance products to fund buy-sell agreements: life insurance and disability insurance.

Life insurance is used to fund a buy-sell agreement in the event of an owner`s death. Both parties purchase life insurance policies on each other, with the face value of the policy equal to the value of the departing owner`s share of the business. When one owner passes away, the surviving owner(s) receive the death benefit from the life insurance policy and use it to buy out the deceased owner`s share of the business.

Disability insurance is used to fund a buy-sell agreement in the event of an owner`s disability. Disability insurance policies pay out a regular income to the disabled owner, which can be used to buy out their share of the business. This ensures that the business can continue to operate without the disabled owner`s involvement, while also providing the disabled owner with a steady income.

By using life insurance and disability insurance to fund a buy-sell agreement, business owners can protect their investment and plan for the future. With these insurance products in place, business owners can have peace of mind knowing that their business will continue to thrive even if the unexpected happens.

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