What is a key-person life insurance? How does it influence a buy-sell agreement?
What will be an ideal response?
In many small businesses, such as partnerships, limited liability companies, and close corporations, the death of one of the owners may cause a loss to the business. To compensate for such loss, the business often purchases key-person life insurance on owners and other important persons who work for the business. The business pays the premiums for the key-person life insurance policies. Upon the death of the insured person, the proceeds of the key-person life insurance are paid to the business. Sometimes key-person life insurance is used to fund buy-sell agreements among the owners of the business. Thus, if an insured owner dies, the insurance proceeds are paid to the deceased's beneficiaries, and the deceased's interest in the business then reverts to either the other owners or the business, according to the terms of the buy-sell agreement.
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