Buy-Sell Term Life Insurance
Buy-Sell Term Life Insurance: Securing the Future of Your Business Partnership
In business, partnerships are built on trust, strategy, and mutual goals. But what happens when one of the partners unexpectedly passes away? The loss of a partner is not just an emotional shock—it can also shake the financial foundation of a business.
This is where Buy-Sell Term Life Insurance steps in as a critical safeguard.
Let’s explore what it is, how it works, and why it’s essential for any business with multiple owners or shareholders.
What Is a Buy-Sell Agreement?
A Buy-Sell Agreement is a legally binding contract between business co-owners that outlines what happens to an owner’s share if they die, become disabled, or choose to leave the business.
Common goals of a buy-sell agreement include:
- Ensuring business continuity
- Avoiding conflicts with heirs or spouses
- Providing a clear exit strategy
- Preserving the financial stability of the company
But while the agreement outlines what should happen, it doesn’t solve how it will be funded. That’s where Buy-Sell Life Insurance comes in.
What Is Buy-Sell Term Life Insurance?
Buy-Sell Life Insurance is a funding mechanism for a buy-sell agreement. When structured with term life insurance, it’s a cost-effective way for business partners to ensure funds are available if one of them passes away.
Here’s how it works:
- Each owner takes out a term life insurance policy on the life of the other owner(s).
- If a partner dies, the surviving partner(s) use the death benefit to purchase the deceased’s share of the business.
- The deceased partner’s family or estate receives a fair market value for their interest—without causing financial strain on the company or its owners.
This setup ensures that both the business and the family are protected.
Why Use Term Life Insurance?
While permanent life insurance offers cash value and longer-term coverage, term life insurance is often preferred in buy-sell agreements for its:
- Affordability: Lower premiums compared to permanent policies
- Simplicity: Pure death benefit protection
- Flexibility: Coverage can be aligned with the expected business partnership duration
It’s especially ideal for:
- New or small businesses on a budget
- Partnerships where owners plan to retire, sell, or exit within 10–30 years
- Companies with a clear succession or transition plan
Types of Buy-Sell Life Insurance Structures
- Cross-Purchase Agreement
- Each partner owns a policy on the others.
- Upon death, the surviving partner uses the proceeds to buy the deceased’s share.
- Entity Purchase (Stock Redemption) Agreement
- The business owns the policies and buys back the deceased owner’s share.
- Simpler for businesses with many owners.
- Wait-and-See Agreement
- A hybrid approach where the business and owners decide who buys the interest after a triggering event.
Real-World Scenario
Let’s say two partners, Sarah and Tom, each own 50% of a successful digital agency. They have a buy-sell agreement funded by a $1 million 20-year term life insurance policy on each other.
Tragically, Tom passes away unexpectedly.
- Sarah receives the $1 million death benefit.
- She uses the funds to buy Tom’s 50% share from his family, per the agreement.
- Tom’s family gets the fair value of his ownership, and Sarah retains full control of the business—without going into debt or selling assets.
Everyone’s financial interests are protected.
Key Considerations
Before setting up Buy-Sell Term Life Insurance, consider:
- Valuation: Ensure the business is properly valued and reviewed regularly.
- Term Length: Choose a term that aligns with your succession or retirement plan.
- Legal Review: The buy-sell agreement must be drafted or reviewed by legal and tax professionals.
- Policy Ownership: Determine who owns and pays for the policies (owners vs. business).