Life insurance buy-sell agreements are a key component of many businesses, providing a valuable financial safety net in the event of the death of a key partner or shareholder. These agreements help ensure the continuation of the business without disruption and allow for a smooth transition of ownership in times of uncertainty. There are four main ways life insurance buy-sell agreements are structured, and understanding each one is crucial to making the right decision for your business.

1. Cross-Purchase Agreement

In a cross-purchase agreement, each business partner buys a life insurance policy on the other partners. In the event of a partner’s death, the surviving partners use the life insurance proceeds to purchase the deceased partner’s share of the business. This structure is ideal for businesses with a small number of partners or shareholders.

2. Entity Purchase Agreement

In an entity purchase agreement, the business itself buys life insurance policies on each shareholder. In the event of a shareholder’s death, the business uses the proceeds to purchase the deceased shareholder’s shares. This structure is ideal for businesses with a large number of shareholders.

3. Wait-and-See Agreement

In a wait-and-see agreement, the business agrees to purchase the deceased shareholder’s shares, but the structure of the agreement is not decided until the time of death. The surviving shareholders can then choose whether to use the cross-purchase or entity purchase agreement method. This structure is ideal for businesses unsure of which agreement would be best for their situation.

4. Hybrid Agreement

In a hybrid agreement, a combination of cross-purchase and entity purchase agreements are used. For example, the business may purchase policies on the majority shareholders while the minority shareholders purchase policies on each other. This structure is ideal for businesses with a mix of large and small shareholders.

In conclusion, life insurance buy-sell agreements are an important consideration for any business with multiple shareholders or partners. The four structures mentioned above provide different options depending on the size and structure of your business. It is important to consult with a legal and financial professional to determine which structure is best for your specific situation. With the right agreement in place, you can ensure the continued success of your business and the financial security of all involved.