What is considered a valid reason for small businesses to insure the lives of its major shareholders?

What is considered a valid reason for small businesses to insure the lives of its major shareholders?

• A. Fund a buy-sell agreement
• B. Ensure financial growth
• C. Reduce operational costs
• D. Protect against market fluctuations

Answer: (A)

Insuring the lives of major shareholders is a strategic decision often related to financial stability and continuity of the business. A primary reason for this practice is to fund a buy-sell agreement, which is a legally binding arrangement between business owners that stipulates what happens to a shareholder's share of the business in the event of their death or departure. By having life insurance on the major shareholders, the business can ensure that there are sufficient funds available to purchase the deceased shareholder's interest from their estate. This helps maintain the company's operational integrity and prevents external parties from acquiring ownership stakes, which could disrupt the business. The funding provided by the life insurance policy ensures that the remaining shareholders have the financial means to buy back the shares, thus securing their control and the future of the business. The other options pertain to broader business goals but do not directly relate to the necessity of insuring the lives of major shareholders for the specific purpose of ensuring business continuity and control after a significant event such as a death.

Insuring the lives of major shareholders is a strategic decision often related to financial stability and continuity of the business. A primary reason for this practice is to fund a buy-sell agreement, which is a legally binding arrangement between business owners that stipulates what happens to a shareholder's share of the business in the event of their death or departure.

By having life insurance on the major shareholders, the business can ensure that there are sufficient funds available to purchase the deceased shareholder's interest from their estate. This helps maintain the company's operational integrity and prevents external parties from acquiring ownership stakes, which could disrupt the business. The funding provided by the life insurance policy ensures that the remaining shareholders have the financial means to buy back the shares, thus securing their control and the future of the business.

The other options pertain to broader business goals but do not directly relate to the necessity of insuring the lives of major shareholders for the specific purpose of ensuring business continuity and control after a significant event such as a death.