Mr. and Mrs. Lee, both 60, own a small, profitable manufacturing business. They have discussed with their financial planner the importance of business succession planning and protecting the business from the financial impact of a critical illness or death of either partner. They are considering a buy-sell agreement funded by insurance. Which type of insurance is most appropriate to fund the 'death' component of this agreement, and why?

Question: Mr. and Mrs. Lee, both 60, own a small, profitable manufacturing business. They have discussed with their financial planner the importance of business succession planning and protecting the business from the financial impact of a critical illness or death of either partner. They are considering a buy-sell agreement funded by insurance. Which type of insurance is most appropriate to fund the 'death' component of this agreement, and why?

Answer options:

• Term life insurance, due to its low cost and the certainty that death will eventually occur.
• Whole life insurance, as it builds cash value that can be accessed for business needs prior to death.
• Universal life insurance, offering flexibility in premium payments and investment components for business growth. ✅ Permanent life insurance (whole life or universal life), because it ensures funds are available whenever a partner dies, unlike term insurance which might expire.

Correct answer: Permanent life insurance (whole life or universal life), because it ensures funds are available whenever a partner dies, unlike term insurance which might expire.

Explanation: For a buy-sell agreement, permanent life insurance (whole life or universal life) is generally preferred to fund the death component. This is because it guarantees a payout upon the death of an insured partner, whenever that occurs, ensuring the funding is available for the buyout, which term insurance might not do if it expires before death.