Why do we need Business ownership insurance?

When multiple individuals enter a business arrangement, one important financial planning is to ensure a smooth transition of ownership in the event of the death, the disablement or a traumatic health episode of an owner. This is the role of buy/sell agreements in business succession planning.

Using insurance to fund a buy/sell agreement can assist in this process.

Buy/sell agreements and business succession planning

Buy/sell agreements are part of the business succession planning process. If a person dies or is unable to continue in a business due to total and permanent incapacity or a traumatic health event, then such an arrangement ensures the business for the continuing owner(s).

A buy/sell agreement can also provide the departing owner or their estate with funds equivalent to the value of the departing owner’s share of the business.

What is a buy/sell agreement?

A buy/sell agreement is made up of a transfer agreement and a funding agreement.

The transfer agreement relates to the transfer of the departing owner’s interest in the business to the surviving owners should a trigger event (commonly death, disability or a traumatic health event) happen.

The funding agreement relates to how the departing owner will be compensated for surrendering their interest in the business.

Insurance policies are a common way to fund a buy/sell agreement.