Buy-Sell Agreements: Sales Opportunities for Any Market

  • Originally published February 16, 2011 , last updated May 24, 2016

Even in a tough economy, buy-sell arrangements present great sales opportunities with the small-business market.

What Is a Buy-Sell Agreement?

Also known as a 'business will,' a buy-sell agreement may be thought of as a sort of "premarital agreement" between business partners/shareholders.

A Buy-Sell Agreement is a binding contract between co-owners of a business that controls when owners can sell their interest, who can buy an owner’s interest and what price will be paid. What does this have to do with life insurance? These agreements come into play when an owner retires, goes bankrupt, becomes disabled, gets divorced, or dies. In the absence of any kind of Buy-Sell Agreement, if a co-owner dies, their share of the business would automatically be transferred to his or her spouse. In cases where it is not desirable for the spouse to take an ownership interest, a buy-sell agreement can be drafted. This involves determining an agreed upon purchase price that would allow the living partner to buy the deceased partners share from the spouse. The partner takes out a life insurance policy for that amount to provide the needed capital to make the purchase.

What's the Market?

Nearly every established small business is a candidate to discuss a buy-sell agreement. With regard to buy-sell arrangements, small businesses typically fall in to one of three categories:

  1. Haven’t put an agreement in place or haven’t considered one
  2. Have an agreement, but haven’t funded it
  3. Have a funded agreement, but have not reviewed it for a number of years

How Can You Help Each of These Prospects?

No Agreement in Place

If a prospect does not have an agreement, you can help by educating him/her on the potential impact a premature death can have on the continuation of his/her business. Help them discover their wishes for their business and encourage them to put an agreement in place that is financed with life insurance.

Agreement in Place, but Not Funded

Surprisingly, there are numerous small businesses that have buy-sell agreements in place, but they have not purchased the life insurance to fund it. This is sometimes due to budget concerns, but most often is attributed to a lack of follow-through. This is a great opportunity for you.

Typically, a permanent policy would be purchased for this purpose. However, there are alternative solutions if your prospect cannot afford a permanent policy. One option is a stop-gap. With this option one purchases a term insurance policy with a PLANNED conversion in a few years. This allows the client to fund the buy-sell arrangement now while planning to address the long-term need later.

A Funded Agreement Is in Place, but Needs Reviewing

This is an excellent opportunity for a sale. If the prospect has not reviewed their agreement for many years, it is most likely out-of-date.

In reviewing the policy, you should consider:

  • Are there any new owners?
  • Do they have a death benefit guarantee?
  • Can the client afford the same or more coverage for less premium?
  • Are the policies funding the agreement out-of-date?
  • Are the ownership/beneficiary designations proper?
  • Is the business value correct?

Find out which category your client or prospect falls into. This may be the perfect time to talk about buy-sell arrangements!