Buy-Sell Agreement Life Insurance

Buy-sell agreement life insurance funds a written buy-sell agreement so that when a co-owner dies, the surviving owners or the business itself can buy that owner’s share. The price and terms are the ones the agreement sets. The agreement is the legal instrument. The life insurance is the cash that lets the agreement be performed on the day it is needed, without a fire sale of assets or a loan taken under pressure. Which of the two ways to structure it you choose decides who owns the policies, whose insurable interest supports them, and whether a federal tax condition attaches.

Schneiderman Insurance Agency places buy-sell funding for partnerships, LLCs, and closely held corporations across the Los Angeles area, alongside the attorney who drafts the agreement and the CPA who confirms the structure.

What are the two structures, and how do they differ?

Entity purchase, sometimes called stock redemption: the business owns a policy on each owner, pays the premiums, and is the beneficiary. At an owner’s death the business collects the death benefit and buys the deceased owner’s interest from the estate. Cross purchase: each owner personally owns a policy on each of the other owners and buys the deceased owner’s share directly. With two owners that is two policies. With four owners it is twelve, which is why cross purchase gets unwieldy quickly and why hybrid and trusteed arrangements exist. The choice is a legal and tax decision your attorney and CPA make with you. Our job is to see that the policies match whatever structure they choose.

Who has an insurable interest in a co-owner’s life under California law?

Insurance Code section 10110.1 answers this directly. An employer has an insurable interest in its directors, officers, and employees. And where there is a contractual arrangement with a shareholder to reacquire that shareholder’s shares at death, the party to that arrangement has an insurable interest in the shareholder’s life. The interest exists for the purpose of carrying the arrangement out. That second clause is what makes both structures work in California: the business under entity purchase, and the co-owners under cross purchase, each hold an insurable interest because the buy-sell agreement exists. The agreement therefore has to be in place, or at least in draft with the terms settled, before the policies are applied for, not after.

What tax condition attaches to an entity-purchase policy?

Where the business owns the policy on an owner who is also an employee, the contract is employer-owned life insurance under Internal Revenue Code section 101(j). The general rule of that subsection limits the income-tax-free death benefit to the premiums the business paid. The exception that restores the full exclusion requires two things. The insured was a director, a highly compensated employee, or otherwise within the listed categories. And the written notice and consent requirements were met before the policy was issued. Signing the consent after issue does not cure it, and the exclusion cannot be repaired after the insured has died. Premiums on a policy where the business is the beneficiary are also not deductible under section 264(a)(1), so the funding is after-tax dollars. Your CPA confirms both against your own entity type and ownership; we do not give tax advice, and this page does not replace that confirmation.

The Insurance Code and Internal Revenue Code provisions here are as published at the time of writing. Both are amended from time to time; the California Legislative Counsel and the Office of the Law Revision Counsel publish the current text.

How is the coverage amount set, and how does it stay current?

The face amount follows the agreement’s valuation of each owner’s share, and the two have to match. A buy-sell that values the company at a figure the policies cannot fund leaves the survivors making up the difference from the business or from their own pockets. A common failure is an agreement drafted at founding and never revisited while the business triples. We review the face amounts against the current valuation method at each renewal, and we ask the attorney whether the agreement itself has been updated. Term policies fit a buy-sell with a foreseeable end, such as a planned sale or retirement. Permanent policies fit one meant to run for the life of the business, and a permanent policy’s cash value is a feature of the contract, not an investment.

What California protections apply to the policies?

The same ones that apply to every individual life policy issued or delivered in this state. Incontestability after no more than two years in force under section 10113.5. A 60-day grace period under section 10113.71, and no lapse for nonpayment without 30 days’ mailed notice to the owner and to a named designee under section 10113.72. For a business-owned policy the designee should be a second officer or the company’s attorney, so that one person’s absence does not let the funding for the whole agreement lapse.

Who buys buy-sell agreement life insurance?

Partnerships, LLCs, and closely held corporations with two or more owners. Owners who want an agreed price and a funded purchase rather than a dispute over value with a grieving family. Families who want a fair payout without being pulled into running a business they did not choose. Where one owner is also the person the revenue depends on, a buy-sell often sits alongside key person life insurance; they fund different problems, one buys the share and the other steadies the business.

How do we help with buy-sell funding?

We size the coverage to the agreed value, explain entity purchase and cross purchase in plain terms, and request quotes on each owner. We coordinate with your attorney and CPA so the policies, the insurable interest, and the notice-and-consent paperwork line up with the agreement. The wider picture is on our life insurance page, and the business insurance page covers the rest of the company’s program.

Every business is different, and this page does not replace legal and tax advice. To start, request a quote below or call 818-322-4744.