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Buy-Sell Insurance for Ontario Business Partners
Buy-sell insurance is life insurance that pays for a shareholder's shares when that shareholder dies, so the surviving owners can buy them from the family as the shareholder agreement says. WealthPillar reviews your agreement, the share values and who should own each policy, and works with your accountant and lawyer. We are paid by insurer commission.
Most partners sign a shareholder agreement with a buy-sell clause and never ask where the money would come from. If one of you died next month, could the company or the other owners write a cheque for that person's shares? For most owner-run corporations the honest answer is no. Insurance is often the simplest way to have the cash ready on the day it is needed.
What problem does buy-sell insurance solve?
When a shareholder dies, their shares go to their estate. The family usually wants cash, not a seat at the board table of a business they don't run. The surviving owners usually want full control back. A buy-sell clause says the shares will be bought and at what price. Without funding, the buyers may have to borrow, pay the family over many years, or sell assets the business needs. That can strain a company and a family friendship at the worst possible time.
A funded agreement turns that clause into a plan. The policy pays out, the shares are bought at the agreed value, the family receives money, and the business carries on with the remaining owners.
Who needs buy-sell insurance?
- Two or more shareholders who work in the business. Partners in a trucking company, a contracting firm, a clinic, a restaurant group or a professional practice.
- Family co-owners. Siblings or cousins who own a company together, where one family would inherit and the other would run the business.
- Owners with a shareholder agreement that mentions death but not money. The clause exists, the funding doesn't.
- Owners planning a future handover. A key employee or a child who will buy the business one day, and needs a way to do it if something happens first.
How does a buy-sell agreement get funded with insurance?
There are two common setups, and your lawyer and accountant should choose between them with you.
The corporation owns the policies. The company owns a policy on each shareholder, pays the premiums and is the beneficiary. When a shareholder dies, the company uses the money to buy back (redeem) the shares from the estate. This is simple to run because there is one payer and the cost is shared through the company. In a private corporation, much of the death benefit can usually be added to the capital dividend account, which affects how money can later be paid out to shareholders. The details depend on how the policy and the agreement are set up, so this part belongs with your accountant.
The shareholders own policies on each other. Each partner owns a policy on the other partners (often called criss-cross ownership) and uses the payout to buy the shares personally. This can work for two partners of similar age, but it becomes awkward with three or more owners, and premiums are paid with personal after-tax money.
Holding companies add another choice: whether the operating company or each partner's holding company should own the policies. That decision can change who receives the money and how it can move afterwards. We show the options side by side and leave the structure decision to you and your professional advisors.
How much buy-sell coverage do partners need?
The coverage should match the value of each shareholder's shares, and that value changes as the business grows. These are the questions we work through:
- What is the business worth today, and how was that number reached? Many agreements use a formula or a value the partners sign off each year.
- What percentage does each shareholder own, and are there different classes of shares or a family trust in the structure?
- Does the agreement say the purchase must be fully funded by insurance, or can part be paid over time?
- Are any shares held through a holding company?
- When was the valuation last updated? A value from five years ago can leave the family short.
The insurer also decides how much it will approve, based on the shareholder's age, health, income and the financial information for the business. Final numbers come out of underwriting.
Term or permanent insurance for a buy-sell?
Term insurance costs less at the start and suits partners who expect to sell or retire within a set period, such as 10 or 20 years. Permanent insurance lasts for life while premiums are paid and costs more. It can suit owners who plan to hold the shares until death, where the buy-out will happen whenever that is. Many partners start with term and keep the option to convert part of it later. We set out the cost and the limits of each, in writing, before anyone decides.
What if a partner gets sick or can't work?
A life insurance policy pays on death only. A partner who becomes disabled can be a harder problem: they can't work, still own shares, and may need money. Some agreements deal with this through a disability buy-out clause, which can be funded with disability buy-out insurance, or with critical illness insurance that pays a lump sum on a covered diagnosis. These products have their own waiting periods and definitions, and not every insurer offers every one. See critical illness and disability insurance.
Is buy-sell insurance the same as key person insurance?
No. Key person insurance gives the company money to survive the loss of an important person: lost profit, loans, a replacement. Buy-sell insurance gives someone money to buy that person's shares. A company with partners often needs both, and the two are set up with different owners and beneficiaries, so they shouldn't be blended into one policy without thinking it through.
