Before you can make a decision on a buy-sell agreement, it is best you consider the different ways of funding it. Typically, business owners fund their buy-sell agreement with a life insurance policy. Depending on the type of buy-sell agreement you have and your business, life insurance funding may be the best option. Many choose the life insurance route because of what it provides.
Firstly, it helps the business or remaining co-owner obtain the money to purchase the stocks left to your family. Secondly, the insurance company typically provides death benefits fast once a claim is made. This allows the purchaser to make a quick purchase of your stocks.
Thirdly, the premiums are almost always the same. It greatly depends on the insurance policy you have, but level premiums allow you to plan payments easily. Finally, insurance premiums have taxes tacked on so the beneficiaries should be received relatively income tax-free.
Even though life insurance is the most common way of funding a buy-sell agreement, it is not the only way.
The sinking fund method holds back the business’s profits and setting them aside to fund the buy-sell arrangement. This method is not beneficial for businesses with only one owner. Once the owner dies after the implementation of this process, the business will be unable to accrue enough funding to redeem the business.
Installment purchases are made yearly with overflow funds, but it rarely collects enough funds to buy back the stocks of an owner. Many avoid this option because of its limit in cash flow and its effects on interest.
Lastly, you can always borrow funds to supply the buy-sell agreement. Borrowing money always comes with its drawbacks. Banks or creditors may have less confidence in the business if one of its key owners is departed or has passed. Plus, you have to keep in mind the future of the business. If it needs a loan in the future, then it may not have good enough credit to obtain the funds.
Choose the Proper Method of Funding
Regardless of the method you choose, it needs to fit your needs and your business. If a life insurance policy is the best option for you, then call Texas Insurance Agency at (281) 398-1010. Our agents will help you find the right life insurance policy for your business and your situation. Visit our commercial insurance page for additional details.