No Buy-Sell Agreement: the day the music died

November 2, 2022

1 minute read – Do you have the proper amount and life insurance policy design for your key people-owners? “We have key person life insurance all taken care of.” My next question is, ‘and is it paired with a Buy-Sell Agreement?’

What does the answer matter?  We have a key person-owner related to the corporation. Additionally, we have an insurance policy owner, payor, and beneficiary being that corporation, or related key person(s). All is good, right?  RIGHT!? Not so fast. Where’s the ‘legal stickiness’ (aka: Buy-Sell Agreement) pulling this all together?

Without a Buy-Sell Agreement the Music Dies:
  • The surviving owners are under no legal obligation to buy, leaving the estate of the deceased (probably the surviving spouse) in a lurch.
  • The deceased’s estate is under no obligation to sell, leaving the deceased’s heirs as a new owner in the business.
  • There is no fixed price for the business for estate or for income tax purposes should the IRS get involved.
  • Re-arrangement of interests in the remaining policies could constitute a transfer-for-value.

Of course the worst that could happen is for someone to die with no coverage in force.  But what about that Buy-Sell Agreement? From an advanced life insurance underwriting position, the quick solution (not the best one) is to get something in writing. Perhaps a narrative on the application or cover letter that’s attached to each of these policies when initially written, indicating what these represent, for whom, and for when. Signed by all related parties, to include the writing agent/advisor. This will remain with that insurance carrier’s file and more than likely a part to the actual policy.

Moral to the story:  The music abruptly ends without  legal documentation wrapping around key person life insurance policies. Time to get a Buy-Sell Agreement. Or, Time to review what’s in place now. Lastly, time to make sure the big, key person life insurance policies in place actually tie-in with your legally documented Buy-Sell.

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