There are a number of different ways to fund a buy-sell agreement depending on the type of scenario that could result in the agreed-upon buy-sell.
A buy-sell could be triggered by a couple of scenarios such as retirement or when one or more of the business partners no longer wants to participate in the business venture and would want an exit.
Another reason that could trigger a buy-sell agreement is if one or more of the partners encounter a serious life event like death, disability, or a serious health condition. This means that the affected partner can no longer participate in the business and must be bought out by the remaining partners who can continue on with the venture. Since the departing partner(s) contributed resources and efforts to building the business, their share or interest in the company must be paid to them or their heirs.
The goal of this article is to help you understand how insurance policies can be an effective part of your company’s financial strategies in protecting your business’ future in case one of the business partners dies, become disabled, or seriously ill during the life of the business.
There are different types of insurance that you can implement to protect your business as well as each of the business owner’s financial well-being in case any of these events ever happen.
Why Have A Buy-Sell Agreement in Place

The buy-sell agreement is one of the most important legal documents a business partnership can have. It protects both the company and its owners in case something happens to either party, when one of the parties retires, or when one or more parties decide to exit the business.
Think of it as a prenuptial agreement amongst partners or shareholders of a company.
It defines how the company will continue in the event that one of the partners dies, becomes disabled, or otherwise can no longer participate in the business.
A buy-sell agreement is essential for closely-held businesses, such as partnerships and family-owned businesses. It’s also important for companies with just a few shareholders.
Buy-sell agreements are not just for big businesses; they can be adapted to fit the needs of any size business.
Many small business owners don’t realize the importance of having a buy-sell agreement in place until it’s too late. When one of the partners dies or becomes disabled, the surviving partners are often left scrambling to figure out what to do next. This can lead to disagreements and conflict amongst the partners, which can quickly spiral out of control.
A buy-sell agreement can help prevent these types of disputes by clearly defining what will happen if one of the partners dies, becomes disabled, or otherwise can no longer participate in the business.
Buy-Sell Agreement Life Insurance
You can fund a buy-sell agreement with life insurance. You can use term life, whole life, or universal life insurance. The type of life insurance policy you and your business partner choose will depend on how long you intend to keep the buy-sell agreement in place, as well as the lifespan of your business venture or project.
If it’s a joint venture for a project like a real estate investment that you intend to sell down the road, term life insurance may suffice, however, if it’s a business venture of a longer lifespan, and perhaps one that you intend to grow over time. A universal life insurance policy with an increasing death benefit may be your best choice.
Universal life insurance is life insurance with an investment component. The insurance and the savings elements are unbundled with a Universal Life policy, and the policy owner can choose between a wide range of investment options in which to allocate the savings portion of the premium. This flexibility makes Universal Life an ideal way to fund a buy-sell agreement.

The Importance of Life Insurance in a Buy-Sell Agreement
One of the most important aspects of a buy-sell agreement is funding. The agreement is worthless if there’s no money to buy out the departing partner’s share of the business.
This is where life insurance comes in.
Life insurance provides the funds necessary to buy out a partner’s share of the business in the event of their death. This ensures that the business can continue without any interruptions and that the surviving partners don’t have to come up with the money themselves.
Without life insurance, the surviving partners would likely have to take out a loan to buy out the deceased partner’s share of the business. This could put a strain on the business and its cash flow, as well as put the surviving partners at risk if the business fails.
A life insurance policy also provides peace of mind for the partners. Knowing that their families will be taken care of financially if something happens to them allows them to focus on running the business and growing it without worry.
How to Fund a Buy-Sell Agreement with Life Insurance
There are a few different ways to fund a buy-sell agreement with life insurance. The most common method is to have each partner take out a life insurance policy on themselves and name the other partners as the beneficiaries.
The death benefit from the policy can then be used to buy out the deceased partner’s share of the business. This method is often used when the partners are equal owners in the business.
Another way to fund a buy-sell agreement with life insurance is to have the company take out a policy on each of the partners. The company would be the owner and beneficiary of the policies.
This method is often used when one or more of the partners owns a larger share of the business than the others. It’s also sometimes used in family-owned businesses, where one family member owns a majority stake in the company.
No matter which method you choose, it’s important to make sure that the buy-sell agreement is properly funded. Otherwise, it may not be able to do its job when it’s needed most.
What Is Life Insurance

Life insurance is a type of risk management solution that pays out a death benefit to the named beneficiary upon the life insured’s death. The money can be used for anything, but it is often used to cover final expenses like funeral costs, pay, and outstanding debts. It can also be used to replace a breadwinner’s lost income or to help with estate taxes.
In the case of a buy-sell agreement, life insurance can provide the necessary funding to buy out the deceased partner’s share in the company. These funds are usually paid to the deceased partner’s estate or heirs.
How Does Life Insurance Work?
There are two main types of life insurance policies: term life insurance and permanent life insurance. Term life insurance covers you for a set period of time, usually 10-30 years. If you die during that time frame, your beneficiaries will receive the death benefit. If you don’t die during that time frame, the policy expires and you get nothing. Permanent life insurance, on the other hand, covers you for your entire life. As long as you pay the premiums, your beneficiaries are will receive the death benefit when you die.
The Universal Life Policy
Universal life is a type of permanent life insurance that offers flexibility and potential cash value accumulation. This makes it an attractive option for business owners looking for a way to fund their buy-sell agreement.
Under a universal life policy, the policyholder pays premiums into the policy. The money is then invested by the insurer, and the earnings grow tax-deferred. The policyholder can choose how much to pay in premiums and can even make withdrawals from the policy’s cash value.
There are a few things to keep in mind with a universal life policy, though. First, the death benefit is not guaranteed. It will fluctuate based on the performance of the investments within the policy. Second, if you make withdrawals from the policy’s cash value, it will reduce the death benefit and could affect your ability to borrow against the policy later on.

Whole Life Insurance
Whole life insurance is a type of permanent life insurance that offers a guaranteed death benefit and cash value accumulation. This makes it an attractive option for business owners looking for a way to fund their buy-sell agreement.
Under a whole life policy, the policyholder pays premiums into the policy. If it’s a participating policy, the policy will earn dividends, and the earnings grow tax-deferred. The policyholder or payor can choose the length of the contribution period from between 10-20 years or a lifetime.
After the contribution period, if you chose a limited-pay option, the death benefit is guaranteed for the rest of the life insured’s life. If you opted for a life-pay contribution period, you’ll stay covered as long as premiums are being paid.
Unlife universal life insurance, a whole life policy’s death benefit is guaranteed. It will not fluctuate based on investment performance as there’s no investment component. It earns through dividends (participating) or the cash values are based on surplus contributions if not a participating policy.
Term Life Insurance
Term life insurance is a good option for business owners whose buy-sell agreement has a shorter lifespan. As mentioned, this is specifically suitable for joint-venture agreements that may only last for about 20-30 years.
Term life insurance is relatively affordable and can be purchased in large amounts. However, it isn’t the ideal coverage for long-term financial needs, so if you foresee that your business has a longer need for financial protection against the death of one of the business owners, you may consider implementing either whole life or universal life insurance policy.

Why Use a Universal Life Policy for Your Buy-Sell Agreement?
Life insurance is an important part of any buy-sell agreement because it provides immediate funding for the business in case something happens to one of the owners. If an owner dies, the death benefit can be used to buy out their share of the business.
A universal life policy can be a good option for funding a buy-sell agreement because it offers flexibility and potential cash value growth through its investment component. This means that the death benefit can grow over time, providing more protection for the business. It also gives the policyholder the ability to make withdrawals from the policy if they need to, which can be helpful in case of an unexpected event.
If you’re considering using a universal life policy to fund your buy-sell agreement, first, make sure you understand how the policy works. Second, consider talking to a financial advisor to see if this is the right option for you.
Why Use Whole Life Policy for Your Buy-Sell Agreement?
There are a number of reasons why a whole life policy may be a good option for funding a buy-sell agreement. First, whole life policies offer a guaranteed death benefit. This means that the business owner can be assured that the death benefit will be paid out to the beneficiaries. Second, participating in whole life policies earn policy dividends, instead of market returns, making them an attractive option for business owners.
Third, whole life policies also offer tax-deferred growth, which can help the cash value of the policy to grow over time in a tax-friendly environment.
Critical Illness Insurance
Critical illness insurance is a living benefits insurance policy that pays out a lump sum benefit if the insured is diagnosed with a covered critical illness. This type of policy can be used to fund a buy-sell agreement in case one of the business owners becomes critically ill and is unable to continue working due to a covered condition.
The benefit of a critical illness policy can be used to help cover the costs of treatment, as well as any other expenses that may arise from an unexpected illness.

Disability Insurance
Disability insurance is another important part of any buy-sell agreement. It can provide financial protection in the event that a partner is unable to work due to a long-term illness or injury.
Unlike life insurance and critical illness insurance, disability insurance does not pay out a lump sum, instead, it pays out a monthly benefit, usually around 67% of the person’s monthly income. If one of the business partners becomes incapacitated due to an illness or injury, long-term disability insurance can provide income until the age of 65. Depending on how your buy-sell agreement is structured, disability insurance can be used to help fund the buyout of the disabled partner’s share of the business.
There are a number of different types of insurance that can be used to fund a buy-sell agreement. Each type of policy has its own advantages and disadvantages, so it’s important to understand how each works before choosing a policy.
When deciding which type of insurance to use for your buy-sell agreement, there are a few things you should keep in mind. First, consider the needs of your business and what type of coverage would best suit those needs. Second, think about the length of time you need coverage and choose a policy accordingly.
Buy Sell Agreement Insurance

When it comes to a buy-sell agreement for a business, having a proper insurance policy in place is one of the most important things you can do to protect your business. There are a number of different ways to fund a buy-sell agreement, but insurance provides the best solution for financially protecting your business and your business partners and their stakeholders.
There are three types of insurance policies that you can use to protect yourself, the business, and business partners against the financial impact of serious life events like death, serious illness, or prolonged injury.
Life insurance, critical illness insurance, and disability insurance are all important types of coverage to have in place for a buy-sell agreement to fully protect your business against potential buy-sell scenarios.
Get in touch with us to learn more about the best type of policy for your business and to get a quote.
