Business Life Insurance: Buy-Sell, Key Person Insurance
Buy-Sell notes
Value Crucial documentation
In a Buy-Sell the life insurance carrier typically requests financial documentation for justification of the policy amount.
- What is the business value?
- How was in done?
Two types
- Cross-purchase
- Entity Purchase also called Stock Redemption
Buy-sell agreement can be in the form of a cross-purchase plan or a repurchase (entity or stock-redemption) plan. For greater neutrality and effectiveness of the buy-sell arrangement, the service of a corporate trustee is recommended
The buy/sell agreement will need to state either the value of the business or how the value is to be determined when the agreement is triggered. The agreement will state whether the value to be applied shall be:
- the book value;
- the agreed value;
- the appraised value at the time of the specific event
- capitalization of earnings at the time of the specific event.
One-Way Buy-Sell Agreement
What is the fair market value of what will transfer?
Life insurance (using the example of buying property)
proceeds of life insurance, main functions
- Purchase outright the property
- Pay off taxes if property is gifted
Gift Tax, IRS
Key Person Insurance
Is a life insurance policy that the business purchases on an essential employee in the event of a premature death in order to find, recruit, train replacement, help replace any lost profits, strengthen balance sheet to assure creditors business with continue. The proceeds can be used in several other ways. For a key employee who is also an owner, the policy can assist in a buy out of the deceased person’s interest in the company. The plan can be used as loan collateral, and cash value in the policy is available. For a key employee it can provide retirement income or deferred income.
Key person insurance is easy to establish. Key person insurance is generally limited to five to ten times annual compensation from the company. In some circumstances: age, time to retirement, location of business, it’s 3 to 5x earnings.
The business is owner and policy beneficiary, and the premiums are paid by the business.
Key person insurance can also be used as a way to provide for supplemental non-qualified retirement benefits.