Buy-Sell Life Insurance for Business
Buy-Sell Life Insurance is a cornerstone of smart 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 designing agreements that preserve business stability and family wealth.
What is Buy-Sell Life Insurance?
A Buy-Sell Life Insurance policy funds a legally binding agreement between business partners or shareholders. When one owner dies, becomes disabled, or exits the business, the policy ensures that surviving partners have the funds to purchase the departing owner’s share. This arrangement keeps the business in trusted hands while compensating the family or estate of the departed owner fairly. Keep in mind, this is different than Key Person Life Insurance. If you’re curious of the differences learn more about Key Person vs. Buy Sell Insurance.
Why Businesses Use Buy-Sell Agreements
Without a funded buy-sell plan, a surviving family may inherit ownership in the business without the skills or desire to manage it. Alternatively, partners may lack the capital to buy out the estate. Buy-Sell Life Insurance prevents financial strain by providing an immediate, tax-efficient payout, guaranteeing a smooth ownership transition.
Types of Buy-Sell Life Insurance Agreements
- Cross-Purchase Agreement: Each owner purchases life insurance on the others, using the death benefit to buy out the deceased’s share.
- Entity Purchase Agreement: The business owns policies on each owner and uses proceeds to redeem shares from the estate.
- Hybrid Agreements: Combine features of both structures for flexibility and tax planning advantages.
Key Benefits
- Business Continuity: Keeps operations stable during transitions.
- Fair Value Transfer: Provides heirs a financial payout equal to the business share’s value.
- Estate Protection: Prevents family disputes and ensures liquidity for heirs.
- Partnership Confidence: Gives co-owners peace of mind knowing their succession plan is funded.
- Financing Certainty: Eliminates the need for loans or outside investors during a buyout.
How Much Coverage Do You Need?
Coverage amounts should reflect the ownership interest and fair market value of the business. Use our Life Insurance Quoter below to compare plans and calculate the right amount of coverage for your company’s succession strategy.
Life Insurance Quoter
Secure Your Business Succession Plan
Protect your company’s future with a customized Buy-Sell Life Insurance strategy. Our advisors will guide you in structuring the right agreement for lasting security.
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FAQs: Buy-Sell Life Insurance for Business Owners
What is buy-sell life insurance for a business?
It’s life insurance purchased to fund a written buy-sell agreement among owners. When an owner dies, the policy proceeds provide cash to buy the deceased owner’s shares at the agreed value, keeping control and continuity with the remaining owners.
Which structures are most common—cross-purchase or entity redemption?
Cross-purchase: Each owner owns and is beneficiary of policies on the other owners; buys shares personally. Entity redemption: The company owns the policies, receives the proceeds, and redeems the shares. A “wait-and-see” or trusteed cross-purchase can blend benefits.
How much coverage should each owner carry?
Coverage typically equals each owner’s equity based on the agreement’s valuation method (fixed price, formula, or appraisal). Many businesses add a buffer for taxes, debt payoff, and transition costs and review amounts annually.
Should we use term life or permanent life insurance?
Level term is cost-efficient for a defined horizon (10–30 years). Permanent options (e.g., GUL, whole life, IUL) fit when coverage may be needed indefinitely, when cash value is desired, or when buyouts may occur far in the future.
How are ownership and beneficiaries arranged?
In cross-purchase, each owner typically owns a policy on the other owner(s) and is the beneficiary. In entity redemption, the business owns and is beneficiary. Keep ownership/beneficiaries aligned with the agreement to avoid disputes.
What triggers a buyout besides death?
Common triggers: disability, retirement, divorce, termination, or voluntary sale. Disability buyout insurance is often used to fund a purchase at disability per the agreement’s definition and waiting period.
How do taxes work on premiums and death benefits?
Premiums are generally not deductible; death benefits are typically income-tax free if transfer-for-value rules aren’t violated. Basis and ownership consequences differ between cross-purchase and redemption designs—coordinate with a tax advisor.
We have 4+ owners—do we really need dozens of policies?
Large cross-purchase plans can require many policies. Alternatives include an entity redemption, a trusteed cross-purchase, or a partnership/LLC as policy owner to simplify administration.
What if an owner is uninsurable?
Consider higher coverage on other owners with tax-neutral equalization, a sinking fund, bank financing, installment notes, or annuity funding. Some carriers offer limited-underwriting or guaranteed-issue solutions at smaller amounts.
How long does underwriting take, and are no-exam options available?
Accelerated/no-exam programs can approve in days for eligible ages and amounts. Full underwriting with exams and medical records is typically 2–6 weeks depending on age, amount, and health.
How do we handle valuation so coverage stays accurate?
Include a valuation method (formula or appraisal) plus an annual update schedule. Adjust policy face amounts after major events—new contracts, debt changes, acquisitions, or rapid growth.
Can we use existing policies for the buy-sell?
Often yes by changing ownership and beneficiaries or via collateral assignment/endorsement—ensure compliance with transfer-for-value, insurable interest, and any lender covenants.
Who should pay the premiums—owners or the company?
In a cross-purchase, owners typically pay on policies they own (or equalize via compensation). In a redemption, the company pays. Coordinate with your CPA on equity/basis effects and any payroll or dividend considerations.
What documents do we need to implement the plan?
A written buy-sell agreement drafted by counsel, board/member resolutions as applicable, properly titled policies with aligned beneficiaries, valuation documentation, and a review calendar for updates.
