Buy-sell insurance is simply when insurance is put in place to help fulfill an agreement between business partners. These agreements typically address scenarios when one partner suffers from health issues that affect their ability to contribute to the business or if the death of a partner occurs.
Drew and Bill ran a successful tool and die firm together for a number of years. Bill went out and drummed up new business and Drew made sure that the shop ran smoothly and that the clients were all happy. Than tragically, Bill suffered a massive heart attack and died instantly. How could the business continue without Bill getting new business? To make matters worse, Bill’s widow, Louise, and Drew did not get along and now she owned half of the business.
In contrast, if a proper buy-sell agreement had been in place, the life insurance in place to fund the agreement would have paid Drew and Drew in turn would have used that money to pay Louise for Bill’s portion of the business. At that point, Drew would have been able to find another suitable partner or make alternate arrangements for the continued success of the business.