In a Buy-Sell agreement, how is the deceased's interest typically funded?

In a Buy-Sell agreement, the deceased's interest is typically funded with life insurance policies. This method is commonly utilized because it provides the necessary liquidity to pay for the deceased owner's share of the business without straining the company's finances.

Life insurance policies are specifically designed to provide immediate cash upon the death of the insured, making them an ideal funding vehicle for Buy-Sell agreements. When one business partner passes away, the policy pays out a death benefit, which can then be used by the surviving partner(s) to buy out the deceased's share. This approach facilitates a smooth transition of ownership and helps ensure that the business remains stable without financial disruption.

Other funding options, such as using retirement savings, personal savings, or loans from banks, don't offer the same immediate and sufficient liquidity needed to quickly settle the buy-out terms upon the death of a partner. Retirement savings and personal savings might not be available at the time needed and can also deplete personal funds. Relying on bank loans could potentially introduce debt and complicate the business's financial structure, which may not be favorable in the context of a sudden loss. Thus, life insurance stands out as the most effective and pragmatic solution for funding a Buy-Sell agreement.