Business owners
Funding a buy-sell agreement with life insurance
Life insurance can supply the cash to buy out an owner’s share when they die, so the surviving owners aren’t stuck in business with an estate or a spouse.
It only works if the agreement and the policies match: who buys the interest, who receives the insurance money, and how the price is set.
Who this is for
- Owners with a business partner, a family co-owner, or a shareholder or operating agreement that addresses an owner’s death
- Partners whose agreement is old, unfunded, or uses a fixed price nobody has updated
- Companies that already own policies on their owners and want to know if the setup still fits
Two structures do most of the work: cross-purchase and entity redemption
In a cross-purchase, each owner owns (and usually pays for) a policy on the other owners. When one dies, the surviving owners collect the proceeds and use them to buy the deceased owner’s share.
In an entity redemption, the business owns, pays for and receives the proceeds on each owner, then buys back (redeems) the deceased owner’s interest.
There are also trusteed cross-purchase and “wait-and-see” designs. They add moving parts and aren’t automatically better; your attorney should draft them.
| Structure | Who owns and pays | Who receives the money | What to review |
|---|---|---|---|
| Cross-purchase | Each owner, on the others | The surviving owners | Separate ownership and premium responsibilities |
| Entity redemption | The business | The business | Estate valuation after Connelly; employer-owned policy rules |
| Trusteed cross-purchase | A trustee, under a drafted agreement | Per the trust terms | Actual tax ownership and transfer consequences (counsel review) |
Connelly changed how company-owned buy-sell policies are valued
In Connelly v. United States (decided June 6, 2024), the U.S. Supreme Court held that a company’s obligation to redeem a deceased owner’s shares at fair market value did not offset the life insurance proceeds the company received when valuing the company for federal estate tax.
In plain terms: in an entity-redemption plan, the insurance money can increase the value of the business for estate-tax purposes. The decision did not ban entity redemption or invalidate buy-sell agreements, but any company-owned plan signed before 2024 deserves a fresh look with your attorney and CPA.
Size the coverage to the purchase obligation, not a round number
The death benefit should track what the agreement actually requires someone to pay. That means starting from the agreement’s valuation method, each owner’s percentage, any installment terms, and coverage you already own.
Coverage drifts out of date as the business grows. A policy bought when the company was worth $1 million doesn’t fund a buyout of a $4 million company.
How many policies will you need?
Editorial calculation for 2026, not market data. A conventional cross-purchase uses one policy for each owner-to-other-owner relationship; an entity plan uses one per owner.
| Owners | Cross-purchase | Entity redemption |
|---|---|---|
| 2 | 2 policies | 2 policies |
| 3 | 6 policies | 3 policies |
| 4 | 12 policies | 4 policies |
What to bring to the review
- Your executed buy-sell agreement (or the draft)
- Operating or shareholder agreement
- Ownership schedule with each owner’s percentage
- The agreement’s valuation provisions and the latest valuation
- Recent business financial statements
- Any existing policies on the owners
- Employer-owned life insurance consent and reporting records, if the business owns policies
Mistakes that cost people later
- × Assuming the agreement’s buyout price automatically controls the value for federal estate tax.
- × Funding death only. Disability, retirement, deadlock and voluntary departure need their own answers.
- × Leaving coverage unchanged after the business value or ownership changes.
- × Transferring existing policies between owners or to the business without tax review (transfers can create tax problems).
- × Assuming a trusteed arrangement makes tax or administrative issues disappear.
Questions people ask
How do I avoid ending up in business with my partner’s spouse?+
A funded buy-sell agreement requires (or allows) the surviving owners or the business to buy the deceased owner’s interest, and life insurance supplies the cash. What happens to the interest without an agreement depends on your entity and documents, so have your attorney confirm what your operating or partnership agreement says today.
Should the company own the policies, or should we own policies on each other?+
That is the cross-purchase vs. entity redemption decision. Company ownership is simpler to administer; owner-held policies avoid the Connelly valuation issue but multiply the number of policies as owners are added. Your attorney and CPA should make the call with the policy design in front of them.
Does our old buy-sell agreement still work after Connelly?+
It may still be enforceable, but if the company owns the policies, the insurance proceeds can now increase the company’s value for federal estate tax. That is worth reviewing with your CPA, especially for larger estates.
What if the business is worth more than the insurance?+
Then the buyout is partly unfunded and the gap is usually paid in installments from the business or the surviving owners. A review compares the current purchase obligation with the coverage in force.
Does this also cover a partner becoming disabled?+
Not by itself. Life insurance pays at death. A disability buy-out policy is a separate contract, and your agreement needs a disability trigger that matches it.
Can a trustee hold the policies for all the partners?+
Some plans use a trustee to hold the policies so each owner doesn’t need one on everyone else. It must be drafted by counsel, and it doesn’t automatically eliminate tax or administrative issues.
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Kevin Brown, licensed New Jersey insurance producer (#3003694894)
Kevin Brown Insurance Agency, South Plainfield, NJ. You work with Kevin directly on every life case. Updated November 2026.
Coverage, policy features, premiums and underwriting requirements depend on the insurer, product, applicant and state availability. Approval is not guaranteed. Illustrations are not promises of future performance. Kevin Brown Insurance Agency does not provide medical, legal or tax advice. Consult your attorney or CPA about your circumstances.