Business Uses of Life Insurance
There are generally three types of business organizations: the sole proprietorship,
the partnership and the corporation. Regardless of business type, a business has the same need
as an individual - protection against premature death and the delivery of cash exactly when it
is needed.
This cash need relates to the disposition of a business interest upon the death of the sole
proprietor, a partner or a corporate stockholder. Disposition of the deceased's business asset
usually means the sale of the business, retention of the business within the family or
liquidating the business. The difference between a sale and liquidation is that a sale will
usually result in the family receiving a fair market value for the business interest.
Liquidation is a forced sale which may only bring one-tenth of the true business value.
In some situations, liquidation of the business is necessary or mandated by law. However,
liquidation is the least desirable method of disposing of the deceased's business interest.
The sale or retention of the business requires:
- Proper planning and implementation of business agreements
- A willing and competent successor — buyer
- Cash with which to implement the plan
The principal advantages of the funded buy-sell agreement include:
- A fair market value is established, funded with life insurance, for the benefit of the surviving family
- Buyers of the partnership interest are predetermined and legally bound by the agreement
- The partnership and employee's jobs are secure
- The necessary funding to implement the plan is readily available