Buy-Sell Agreement
A binding contract that pre-arranges what happens to a business owner's share at death or exit, with life insurance providing the money to make it happen.
A buy-sell agreement is a contract among business co-owners (or between owners and the company) fixing in advance who can buy an ownership interest, at what price or formula, and on what triggering events, death, disability, divorce, bankruptcy, retirement, or a falling-out. Without one, a deceased partner's shares pass through their estate to a spouse or children, and the survivors are suddenly in business with grieving co-owners who may want cash, control, or neither.
The agreement is the rules; life insurance is the funding that makes the rules executable. At an owner's death, the Death Benefit delivers exactly the purchase price, in cash, within weeks, income-tax-free, no scrambling for bank loans against a company that just lost a key leader, no decade-long installment note the widow must trust, no fire-sale of assets. The two dominant structures: a cross-purchase (owners insure each other, buy the shares directly, and receive a stepped-up basis) and entity redemption (the company owns one policy per owner and redeems the shares, simpler with many owners, but mind the corporate AMT and the *Connelly* valuation issue your attorney will know about). Hybrid "wait and see" designs keep both doors open.
Two implementation details sink more buy-sells than anything else. Stale valuations: an agreement pegging the company at its value from eight years ago guarantees a fight, use a formula or scheduled appraisals, and update insurance amounts to match. And disability: statistically likelier than death during working years, routinely triggering the agreement with no funding attached, disability buyout insurance exists for exactly this.
Using permanent policies rather than term adds optionality: Cash Value grows as a corporate asset, can help fund a *lifetime* buyout at retirement, and folds into corporate Infinite Banking designs where the business banks on itself. Pair the buy-sell with Key Person Insurance, one protects ownership continuity, the other operating survival, and the business has both flanks covered.
Related terms
Key Person Insurance
Life insurance a business owns on the people it cannot afford to lose, replacing the revenue, relationships, and leadership a death would take with it.
Read moreDeath Benefit
The money a life insurance policy pays to your beneficiaries when you die, generally income-tax-free.
Read moreEstate Planning
Arranging, during life, who gets what, when, and how at your death or incapacity, with documents and structures that keep courts out and intentions in.
Read moreCash Value
The living, liquid equity inside a permanent life insurance policy: money you can borrow against, withdraw, or surrender while you are alive.
Read moreSee how buy-sell agreement fits your situation.
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