Buy-Sell Agreements: Key-Man Insurance
Buy/Sell Agreements are agreements entered into among owners of companies, and they typically provide for and sometimes require sales of interests in the company under particular circumstances described in the agreement. One such circumstance might be the death of a shareholder. For instance consider a company with two shareholders, each holding a 50% interest, which has been in business for some time. If one shareholder were to die the remaining shareholder might not want the deceased shareholder’s heirs, who he or she may not know or trust, to step into the deceased shareholder’s shoes and become involved with the running of the company. For their part, the heirs may have no interest in running the company, and would rather have their interests bought out. In order to accommodate all parties’ anticipated wishes the two original shareholders can enter into a buy-sell agreement which provides for a buy-out of a shareholder upon his or her death, at a price determined per the agreement (and the price may be per an agreed to formula, or based upon a valuation of the company conducted as of the time of death). As the purchase price for the shares may be considerable, the agreement may also require that the company purchase and keep in place an insurance policy (the Key-Man insurance), the proceeds of which are used to fund the purchase of the deceased shareholder’s shares.