Keyman and Buy-Sell Agreements


Ever wondered how your business would be affected if you suddenly lost one of your top salesmen due to an accident? How would the business proceed in the event you lost your CFO due to a sudden illness. These events are rare but can be devastating to even the best-run companies if plans are not put in place to reduce the impact of the loss. Not only is it hard dealing with the emotional impact of the loss but financially it can severely restrict a business moving forward.

Keyman or Key Person Insurance can be used to offset this exposure. By taking out life and/or disability policy on the “key person” the business is able to compensate itself for the financial loss that arises from the death or extended incapacitation of the important member of the business.

Buy-Sell/ Cross-Purchase Agreements:

Another potential devastating loss would be the death of one or all of the owners of the business. Who would run the business in the absence of the owner? How would the ownership interest transfer to the next shareholders? Below are a couple of common strategies used to address this issue.

  1. Buy-Sell Agreement: In this type of arrangement the Business purchases and owns a life insurance policy on the owners(s). The business is also the beneficiary. At the death of one of the owners, the proceeds from the life insurance are then used by the business to buy out the owners interest. Many times this also helps the owners’ estate have the funds available to pay estate taxes if applicable without having to force the sale of the business in a fire sale.
  2. Cross-Purchase Agreement: In this type of arrangement the owners/shareholders take out a life insurance policy on the other owners/shareholders. In the event, one of the owners dies the other shareholders use the proceeds from the life insurance to buy out the owners interest and in turn receive their share increase in ownership of the company.

Keyman and Buy/Sell Agreements are unique to each company. Structuring them correctly takes time to evaluate and set up with the help of an attorney. At Arizona National Insurance we have the resources and knowledge necessary to make sure we set to evaluate and set up a proper succession strategy in the event an unfortunate event were to transpire so the business can continue.

Photo by Jeremy Alford

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