Traditional buy-sell agreements and their respective funding can be set up as cross-purchase or entity (business)-owned. By far the simpler of the two is the cross-purchase method, where one partner is the owner, premium payer, and beneficiary of a life insurance policy covering the other partner or business owner. This is even more relevant given the recent “Connelly Case” court decision that impacted entity-owned life insurance policies.
There is a form of cross purchase arrangement, called a “cross endorsement buy-sell”, that can come into play where the access of permanent life policy cash values as a retirement supplement is a secondary but important consideration. In this setup, each partner purchases his/her own permanent policy and endorses a portion of the death benefit over to the other partner, while retaining future access to the contract’s cash values. At death, the surviving owner receives insurance proceeds to satisfy the obligation set forth in the buy-sell agreement. Death proceeds over and above that obligation are paid to a personal beneficiary.
When and if the business relationship is dissolved, the endorsements would be terminated and the full death benefit subsequently paid to a personal beneficiary. The endorsement can also be removed if an owner retires, leaving the owner with full control and access to the policy for personal planning purposes.
The obvious benefit of this type of funding arrangement is the ability of the business owner to customize the life policy to meet family goals (income replacement and/or succession planning) in addition to funding a business continuation plan. Additional benefits for personal planning, such as long-term care insurance-type riders, can also be added to the contract.
Please contact our agency for additional information and/or a customized illustration.
Our Life Insurance Expert
James is a 40-year veteran of the life insurance marketplace in the Greater Chicago area. His career has included a 22-year association as a branch manager and senior account executive with Hartford Life, earning top national office and top national account executive designations, while qualifying for award-conference level in 20 of those 22 years.
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This is not to be considered tax or legal advice. Please consult with the appropriate professional resources.