Buy-sell agreement funding uses life insurance to provide the liquidity needed to execute a buy-sell agreement when a triggering event occurs (death, disability, retirement, or voluntary departure of a business owner). The buy-sell agreement is a legally binding contract between business owners that defines how ownership interests will be transferred upon a triggering event. Life insurance ensures the funding is available immediately when needed.
Any business with two or more owners who want to ensure orderly business transition. This includes partnerships, S corporations, C corporations, and LLCs with multiple members. Without a funded buy-sell agreement, the death of a partner can result in the business being inherited by uninvolved family members, forced liquidation, or protracted legal disputes. Buy-sell funding is also important for business valuation certainty and estate planning.
Buy-sell agreements can be structured as cross-purchase (each owner buys a policy on the other owners), entity purchase/stock redemption (the business buys policies on each owner), or hybrid arrangements. The agreement sets the valuation method (fixed price, formula, or appraisal), triggering events, and payment terms. When a triggering event occurs, the life insurance proceeds fund the purchase of the departing owner's interest at the agreed-upon price.
Coverage amounts equal each owner's share of the business value. For a business valued at $10M with four equal owners, each owner would need $2.5M in coverage. Premium depends on owner ages, health, and policy type. Cross-purchase arrangements work best for 2-3 owners; entity purchase is more practical for larger ownership groups. Trusteed buy-sell arrangements add an independent trustee to administer the agreement.
A three-partner law firm had a cross-purchase buy-sell agreement funded with $3M policies on each partner. When one partner died unexpectedly, the surviving partners used the $3M in life insurance proceeds to purchase the deceased partner's one-third interest from the estate — providing the family with immediate liquidity while keeping the firm intact and under the control of the surviving partners.