What is a valid reason for small businesses to insure their major shareholders?

Insuring major shareholders is often a strategic move for small businesses, particularly when it comes to funding a buy-sell agreement. A buy-sell agreement is a legally binding contract that outlines what happens to a shareholder's interest in the company when the shareholder dies, becomes disabled, or decides to exit the business.

By obtaining life insurance on the major shareholders, the business can ensure that there are sufficient funds available to buy back the deceased or departing shareholder's shares from their estate or heirs. This process helps maintain stability within the company, prevents potential disputes among remaining shareholders, and ensures that the business can continue operating without disruption caused by changing ownership dynamics. The life insurance payout serves as a financial mechanism that guarantees the remaining shareholders can fulfill their obligations under the buy-sell agreement without straining company resources.

The other options, while they may have validity in different contexts, do not specifically address this critical aspect of managing ownership changes in small businesses.