Indiana State Life and Health Insurance Practice Exam

What is typically the objective of a buy-sell agreement in business insurance?

1. To provide health benefits to employees

2. To protect against loss of business income

3. To ensure business continuity upon owner’s death

4. To minimize tax liabilities

The correct answer is: To ensure business continuity upon owner’s death

The primary objective of a buy-sell agreement in business insurance is to ensure business continuity upon the owner’s death. This agreement is essential for businesses with multiple owners, as it sets forth the terms under which a deceased owner's share of the business will be sold to the remaining owners or to the business itself. The buy-sell agreement helps avoid any disputes or complications regarding ownership when an owner passes away, thereby facilitating a smooth transition and maintaining the stability and operations of the business. This type of agreement is particularly important in closely held businesses where the death of an owner could adversely affect the operations, employee morale, and financial standing of the business. By having a clear and pre-established plan in place, the surviving owners can carry on the business without significant disruption, ensuring that the interests of all parties involved—including employees and clients—are preserved during a difficult time. While health benefits, loss of business income protection, and minimizing tax liabilities are important aspects of overall business strategies, they do not directly pertain to the fundamental purpose of a buy-sell agreement. The agreement's core focus is centered on the transfer of ownership and maintaining continuity, which is vital for the longevity of the business.