Using Life Insurance to Protect Your Business: Buy-Sell Agreements Explained

Insurance products and services are offered through LaTour Advisory Group, Inc., an affiliated company.

If you’re a business owner in Springfield, there’s one conversation that’s easy to delay—what happens to your business if you or your partner can no longer run it? The truth is, many business partnerships unravel not because of a disagreement, but because of a death, disability, or unplanned departure. In these situations, a properly structured buy-sell agreement, backed by life insurance, can become a real lifeline.

What a Buy-Sell Agreement Really Does

At its core, a buy-sell agreement spells out how ownership in a company will change hands when a key partner exits due to death, retirement, or other triggering events. But more than just outlining who gets what, it provides a clear valuation method, a predetermined buyer, and most critically, a plan to fund the transaction, usually through life insurance.

Without that funding, even the best-laid plans fall apart. Surviving partners might not have the liquidity to buy out the exiting partner’s share, leading to delays or even forced asset sales.

Why Life Insurance Is the Smartest Way to Fund It

Life insurance is often the most efficient and reliable source of capital when it comes to buy-sell agreements. When an insured owner passes away, the policy pays out a tax-free death benefit to the designated beneficiary, which is then used to purchase it. This allows:

• Continuity: The business keeps running without disruption or debt.
• Fairness: Heirs receive the full, agreed-upon value for the ownership stake.
• Control: Surviving owners maintain control without having to bring in outside investors or sell assets.

Different Structures, Different Implications

Buy-sell agreements have specific structures. Here are three common approaches, each with unique ownership and tax implications:

• Cross-Purchase Agreement: Each owner holds a life insurance policy on the others. Upon death, the surviving owner(s) use the payout to buy the deceased’s interest. This works best when there are only two or three owners, as it becomes complex to manage with more.
  
• Entity Purchase (Stock Redemption): The business owns and pays for the life insurance policies on each owner. When a triggering event occurs, the business buys back the departing partner’s interest. It’s easier to administer for businesses with multiple owners.
  
• Wait-and-See Agreement: This hybrid structure allows owners to wait until a triggering event occurs before deciding whether the business or individuals will make the purchase. It’s flexible, but it does require more sophisticated legal and tax planning.

Get This Right the First Time—Secure Your Future

In Springfield, many businesses are closely held—meaning your retirement, your family’s financial future, and your legacy are all tied to what happens to your business. A buy-sell agreement is only as strong as the plan behind it. That includes using the right type of life insurance, determining the correct policy amounts, and updating the agreement as your business evolves.

At LaTour Asset Management, we help Springfield business owners protect what they’ve built. Call us at (877) 888-5724 to discuss how a buy-sell agreement—funded through the right life insurance plan—can give you, your family, and your partners greater peace of mind.

Insurance products and services are offered through LaTour Advisory Group, Inc., an affiliated company.