How Insurance Can Protect Your Business

Buy/Sell or Stock Redemption Life Insurance - The Stock Redemption Agreement

Many businesses with multiple owners actually "die" (fail) as a result of the death of one of the owners. Sometimes this is due to the loss of the unique abilities of the deceased owner. Client relationships of the deceased owner's may cease to exsist resulting in a significant loss of business. Creditors and or Banks can also withdraw lines of credit.  Employees can get nervous about the financial stability of the company and begin to seek employement elsewhere. Spouses of the deceased owner can even make demands on the business that the business can’t support. There is good news! Buy/Sell life insurance is insurance on the lives of each of the partners in a business, it can be simple and inexpensive.

Why Buy and Sell Life Insurance?

Typically, the type of insurance used is term life insurance, however, universal life insurance or whole life insurance may also be used. Stock redemption life insurance is designed to "buy out" the spouse of a deceased partner at a predetermined price. Each of the partners and their spouses determine in advance the value of the business and sign a stock redemption agreement to that effect. Term life insurance or other type of life insurance is purchased with a face amount or coverage amount equal to the value of the partner’s interest in the business.

For example, if a business is considered to be worth $1,000,000 and it has three equal partners, each partner’s ownership in the business is valued at $333,333. If one partner owned 60% of the business, another 25% and a third 15%, the values would be $600,000, $250,000 and $150,000 respectively. Normally a business worth $1,000,000 doesn’t have $1,000,000 sitting around in cash. However the spouse of the deceased partner really needs the value of his or her share of the business in cash.

The perfect solution is life insurance, usually term life insurance, that will provide cash at the time of the partner’s death. Stock Redemption Life Insurance works the same way, but the corporation rather than the partners owns the insurance and buys out the deceased partner’s spouse. Term life insurance is the most common type of insurance used.