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Frequently Asked Questions

How can life insurance policies play a role in a buy-sell agreement?

Life insurance policies can play a significant role in a buy-sell agreement, particularly in the context of partnerships, closed corporations, and sole proprietorships. These agreements are designed to manage the division of business interest or share of an owner, partner, or stockholder after they exit the business. To ensure the availability of capital in the event of a partner's death, it's common for partners to take out life insurance policies on each other. In the unfortunate event of a partner's death, the proceeds from the life insurance policy can be used to purchase a portion of the deceased partner's business interest. This ensures the continuity of the business and prevents the business from ending up in the hands of an unintended party, such as a disgruntled spouse of the deceased owner. In the case of a sole proprietorship, where there are no business partners or beneficiaries, a key employee could be eligible to purchase the business interest using the life insurance payout, thereby becoming the successor in ownership of the business.

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