If you are a co-owner in a business, you need to think about the consequences should you or any of your fellow co-owners pass away. If you are the one to pass away, it will most likely leave your estate severely exposed, and the remaining owners could also face potential problems.
For the deceased owner’s estate:
For the remaining owners:
The alternative to insurance through a buy-and-sell arrangement is to borrow the money needed to buy the deceased owner’s share from a commercial bank. However, even if the business is successful in obtaining such a loan, the terms and repayment period could possibly make it unattainable from a cash-flow point of view. In most cases, insurance would therefore be the more affordable solution.
The purpose of a buy-and-sell agreement is to provide the surviving co-owners with cash to purchase the interest of a deceased co-owner. According to the agreement, each co-owner takes out life cover on the other co-owners’ lives. The life cover pays out on the death of a co-owner, which funds the purchase of his or her interest by the surviving co-owner(s).
In the same way, disability cover can be included to fund the buyout of a disabled owner’s share of the business.
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