Buy-Sell Life Insurance is one of the most important (and most overlooked) parts of business succession planning. At Diversified Insurance Brokers, we partner with more than 100 top-rated carriers to help business owners protect continuity, safeguard valuations, and provide financial security when ownership changes due to death or disability. For over 40 years, our advisors have guided companies nationwide in building agreements that preserve business stability and family wealth—so a tragedy doesn’t turn into a financial crisis.

Most owners don’t worry about a buyout until something forces the issue. A partner dies unexpectedly. A key shareholder suffers a disabling event. A family member inherits shares and wants cash instead of involvement. Or a remaining partner wants to keep control but doesn’t have the liquidity to buy the other side out fairly. A properly structured buy-sell plan solves those problems in advance by creating a clear roadmap for what happens next—while life insurance supplies the cash at exactly the moment it’s needed.

What makes this “work” is not just having a policy. It’s aligning three pieces so they operate like a single system: (1) a written agreement drafted by counsel, (2) a valuation method that reflects your real business value, and (3) the right insurance ownership and beneficiary structure so proceeds flow to the correct party without delays or disputes. When those pieces match, the business stays in the right hands, and the departing owner’s family receives a fair, predictable payout—without forcing a fire sale, a rushed loan, or outside investors stepping in at the worst time.

It’s also important to keep buy-sell funding separate from other business life insurance concepts. Many owners hear “buy-sell” and think it’s the same as Key Person Life Insurance. They are related but fundamentally different. Key person coverage is designed to protect the business from the financial loss of losing an essential executive or rainmaker; buy-sell coverage is designed to transfer ownership. If you want the clean comparison, start here: Key Person vs. Buy Sell Insurance. If you’re specifically exploring key person concepts for leadership, see Key Person Life Insurance for Executives.

What is buy-sell life insurance?

Buy-sell life insurance is coverage that is purchased specifically to fund a legally binding buy-sell agreement between business owners, partners, or shareholders. The agreement states what must happen when a triggering event occurs (typically death, and sometimes disability or other exits). The life insurance proceeds provide immediate cash so the remaining owner(s) or the business can purchase the departing owner’s interest at the agreed value.

In plain English: the agreement answers the “who buys, how much, and on what timeline” questions, while the insurance answers the “where does the cash come from” question. Without insurance (or another dedicated funding strategy), the agreement often becomes a promise that can’t be kept under pressure. With insurance, the buyout becomes a planned transaction instead of a scramble.

This arrangement matters because businesses are rarely liquid in the way a buyout requires. Even profitable companies can be cash-tight, and many closely held businesses rely on owners for personal guarantees, relationships, and operational knowledge. When ownership needs to transfer quickly, insurance can be the difference between preserving value and watching the company weaken during uncertainty.

Why businesses use funded buy-sell agreements

Without a funded buy-sell plan, the surviving family may inherit an ownership interest without the desire or skill to manage it, while the remaining partners may not have the capital to buy that share out fairly. That’s how good businesses end up stuck in conflict: the family wants liquidity, the partners want control, and the business can’t afford both at the same time.

A funded buy-sell strategy prevents that situation by creating liquidity at the exact moment a liquidity event occurs. Instead of borrowing at unfavorable terms, selling assets, or bringing in outside investors, the buyout can be completed quickly and predictably. That reduces business interruption risk and protects everyone’s interests—surviving partners, employees, customers, and the family or estate of the departing owner.

Even when owners have “an agreement in principle,” disputes often arise because the valuation method was never clarified or updated. A buy-sell plan should include a valuation approach that can be followed under pressure. Some businesses use a fixed price updated annually; others use a formula tied to revenue, EBITDA, or a third-party appraisal. No single method is “right” for every business, but it needs to be documented and revisited—especially after growth spurts, acquisitions, or debt changes.

When buy-sell insurance is most valuable

Buy-sell funding becomes essential when the business has meaningful value but limited liquid reserves, when owners are not easily replaceable, or when the company is tied closely to personal relationships and guarantees. It is also critical when there are multiple owners with different family circumstances, especially if some owners want their families to receive cash while others want the company to stay within the partner group.

We also see buy-sell insurance become a “must-have” when the business supports multiple households and there isn’t an obvious successor. For example, if two partners split profit distributions and one partner dies, the surviving partner may need to continue operating the company while also buying out the deceased partner’s family. That’s an enormous cash burden without insurance—especially during a period when productivity and revenue may be disrupted.

Finally, buy-sell planning becomes more urgent as owners age, as health risks become more unpredictable, or as key contracts create rapid changes in valuation. A plan that was “fine” when the business was worth $1M is often dangerously underfunded when the business becomes worth $5M.

Types of buy-sell agreements (and how insurance typically fits)

Cross-purchase agreements are commonly used when there are a small number of owners. In a cross-purchase, each owner typically owns life insurance on the other owner(s). If one owner dies, the surviving owner(s) receive the death benefit and use it to purchase the deceased owner’s share. This structure can work very cleanly for two owners and can still work for three or more owners, but the administration can get complex as the number of owners increases.

Entity purchase (redemption) agreements are commonly used when there are multiple owners or when the business wants to centralize policy ownership. In an entity purchase structure, the business owns the policies and is the beneficiary. When an owner dies, the business receives proceeds and uses them to redeem (buy back) the shares from the estate. This can be administratively simpler, though it must be structured correctly with legal and tax guidance.

Hybrid / wait-and-see approaches can blend features of both structures and may be used when owners want flexibility. The “best” structure depends on your ownership count, valuation plan, tax strategy, and administrative preferences. The key point is that the insurance structure must match the agreement language. If the agreement says the company buys shares but the owners personally own the policies, you’ve created confusion at the exact time clarity is needed most.

Key benefits of buy-sell life insurance (in real-world terms)

Business continuity. A funded buy-sell plan reduces chaos and keeps decision-making with the parties who are equipped to manage the business. Employees and customers see stability instead of uncertainty, which protects revenue and enterprise value during a sensitive transition.

Fair value transfer. Your family receives a predictable payout aligned with the business interest’s value, rather than being forced to negotiate from a weak position or accept a long installment note that may be risky.

Financing certainty. Life insurance creates immediate liquidity and reduces reliance on bank financing, outside investors, or distressed asset sales. This is especially important when a death occurs during a recession or a period of tight lending conditions.

Reduced dispute risk. When valuation method, ownership transfer, and funding are clearly defined, the plan becomes less emotional and more transactional. That protects relationships between the surviving partners and the departed owner’s family.

Confidence for co-owners. Owners often work better together when they know there is a clean exit plan. The buy-sell doesn’t just protect against death—it also reduces the “what if” tension that can quietly undermine long-term partnership trust.

How much coverage do you need?

Coverage is usually based on the value of each owner’s share. The simplest approach is to set the death benefit equal to the buyout value, with a built-in process to update coverage as the business value changes. In practice, many businesses add a buffer for transition costs, debt payoff needs, legal costs, or temporary revenue disruption. The right number comes from your agreement’s valuation method, not from a generic “rule of thumb.”

If your valuation is volatile, your strategy may need to be flexible. Some owners use a layered approach: a core amount of insurance that covers the minimum buyout value and an additional strategy (such as retained earnings, a sinking fund, or a secondary policy) that can be adjusted as the business grows. The goal is simple: avoid being over-insured on a shrinking valuation, and avoid being dangerously under-insured on a growing valuation.

Owners also need to decide whether the plan should fund death only or whether it should address disability as well. Disability buyouts can be even more disruptive than death in some cases because an owner may survive but be unable to contribute, while still retaining ownership rights. A complete succession plan often considers both triggers and chooses appropriate funding solutions for each.

Term vs. permanent life insurance for buy-sell funding

Term life insurance is often a cost-efficient solution when owners want a defined protection window (for example, 10–30 years) and expect the ownership transition to occur within that horizon. Level term coverage is straightforward and commonly used when owners are younger and the primary goal is maximum protection per dollar.

Permanent life insurance can fit when the buy-sell need may exist indefinitely or when owners want long-term coverage that can support multiple planning goals over time. Permanent designs can be useful when partners expect to be in business for the long haul, when the business value will remain significant later in life, or when the owners want coverage that can be kept even after the business changes. The best fit depends on budget, underwriting, and the agreement timeline.

In many real-world cases, we design a plan that keeps options open. For example, owners may start with term coverage for efficient funding and later shift the structure as the company matures. If conversion flexibility matters in your planning, review convert term to permanent life insurance so you understand how the “keep your options” strategy can work when health or timeline changes.

Implementation details that prevent problems later

Ownership and beneficiary alignment must match the agreement, period. The most common buy-sell failure is not that people “didn’t have insurance,” but that the wrong party owned the policy or the beneficiary setup didn’t align with the legal structure. That can delay the transaction, create disputes, and even trigger unintended tax issues depending on how changes were made.

Regular updates are just as important as the initial setup. Business valuations change, ownership percentages change, and new partners join. If the buy-sell doesn’t have an update process, it becomes outdated quickly. We recommend building an annual review cycle into the plan so coverage stays aligned with valuation and ownership structure.

Underwriting strategy matters more than most owners expect. A buy-sell plan can fail if one owner is difficult to insure and the plan depends on all owners having equal coverage. When health histories vary between owners, we design around it—using a combination of carriers, policy types, and funding strategies. If you’re dealing with medical complexity, it helps to understand broader underwriting realities like life insurance with pre-existing conditions, since that framework often affects funding decisions for partner groups.

Life Insurance Quoter (estimate pricing and compare options)

Use the tool below to quickly compare life insurance options and estimate coverage costs for buy-sell funding. After you have a baseline, our advisors can help you confirm the correct structure, carrier fit, and ownership/beneficiary setup for your agreement.

Life Insurance Quoter

Why work with Diversified Insurance Brokers

Buy-sell funding is not a “plug and play” life insurance quote. It’s business planning, legal alignment, and underwriting strategy working together. Diversified Insurance Brokers is a family-owned, fiduciary agency licensed nationwide, and we specialize in designing high-stakes coverage structures where the details matter. With access to 100+ top carriers, we can shop for the best underwriting fit, design around complex health profiles, and help ensure your insurance structure matches your agreement.

We also help owners avoid common traps—like under-insuring due to outdated valuations, choosing the wrong ownership structure for a multi-owner partnership, or selecting a policy design that doesn’t match the expected duration of the agreement. If your plan needs to coordinate with other protection layers (key person coverage, executive protection, or broader family planning), we can help you build a comprehensive approach without duplication or gaps.