The Role of Buy-Sell Life Insurance in Business Continuity
In any business with two or more owners, planning for what happens if one dies is critical—but often overlooked. A buy-sell agreement backed by life insurance ensures that if a partner or owner passes away, the business can keep running smoothly, the surviving partner retains control, and the deceased partner’s family is fairly compensated. Without this protection, both the business and the family could face serious legal and financial problems.
A buy-sell agreement is a legally binding contract that outlines how ownership shares will be handled if an owner exits the business—due to death, disability, or even retirement. When funded with life insurance, the agreement becomes instantly actionable. The death benefit is used to “buy out” the deceased partner’s interest, allowing for a smooth ownership transition without requiring loans, asset liquidation, or disputes.
This type of planning is especially important for closely held corporations, professional practices, family-run businesses, and partnerships. It protects not only the financial interests of the company, but also the relationships between founders and their families.
At Diversified Insurance Brokers, we specialize in helping businesses structure and fund buy-sell agreements using life insurance. We work closely with your legal and tax advisors to design a plan that ensures continuity and fairness.
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FAQs: Buy-Sell Life Insurance
What is buy-sell life insurance?
Buy-sell life insurance funds a buy-sell agreement between business partners. If an owner dies, the policy provides the cash needed for the surviving owners or the business to purchase the deceased partner’s share.
How does a buy-sell agreement work with life insurance?
Each owner is insured under a policy that names either the other owners or the business as the beneficiary. When a partner dies, the benefit is used to buy their ownership interest per the agreement’s terms.
What types of buy-sell agreements use life insurance?
The two most common structures are cross-purchase agreements (owners insure each other) and entity-purchase agreements (the business buys the policy and owns the shares).
Who should consider buy-sell life insurance?
Businesses with multiple partners—especially closely held companies—use buy-sell life insurance to prevent disputes, ensure continuity, and protect family members from inheriting business obligations.
What type of policy is used for buy-sell planning?
Most agreements use term life or permanent life insurance. Permanent life is common for long-term partnerships because it guarantees coverage as long as premiums are paid.
What happens if a partner becomes disabled?
Some buy-sell agreements include disability buy-out insurance. This provides funds if a partner is permanently unable to work, allowing the business to execute the buyout without financial strain.
Are buy-sell life insurance premiums tax deductible?
Premiums are generally not tax deductible. Ownership, funding, and tax treatment vary by structure and should be reviewed with a tax professional.
How much coverage is needed?
Coverage usually matches the value of the insured partner’s ownership stake. Businesses review valuation regularly to keep coverage aligned with company growth.
Does the business need a formal agreement?
Yes. A buy-sell agreement is a legal contract outlining terms, valuation methods, and funding arrangements. Life insurance is the funding tool, not the agreement itself.
Why is buy-sell life insurance important?
It prevents business disruption, protects families, ensures a fair buyout price, and avoids forced liquidation or disputes among surviving owners.
About the Author:
Jason Stolz, CLTC, CRPC, is a senior insurance and retirement professional with more than two decades of real-world experience helping individuals, families, and business owners protect their income, assets, and long-term financial stability. As a long-time partner of the nationally licensed independent agency Diversified Insurance Brokers, Jason provides trusted guidance across multiple specialties—including fixed and indexed annuities, long-term care planning, personal and business disability insurance, life insurance solutions, and short-term health coverage. Diversified Insurance Brokers maintains active contracts with over 100 highly rated insurance carriers, ensuring clients have access to a broad and competitive marketplace.
His practical, education-first approach has earned recognition in publications such as VoyageATL, highlighting his commitment to financial clarity and client-focused planning. Drawing on deep product knowledge and years of hands-on field experience, Jason helps clients evaluate carriers, compare strategies, and build retirement and protection plans that are both secure and cost-efficient.
