Investopedia explains ‘Buy And Sell Agreement’
In order to ensure the availability of funds in the event of a partner’s death, most parties will purchase life insurance policies on the other partners. In the event of a death, the proceeds from the life insurance policy are used to purchase a portion of the deceased’s business interest. It is important to note that when a sole proprietor dies, since he/she has no partners, a key employee is the buyer or successor.
Here’s a good read on how to avoid common buy-sell mistakes: http://www.cannonfinancial.com/resources/newsletter/CI-Planning0311.pdf