The agreement is the plan; insurance is the money
Draft with counsel first, fund second, revalue regularly.
Business uses · Buy-sell
Funding a buy-sell agreement with life insurance: cross-purchase, entity purchase, and where IUL fits
When a partner dies, a buy-sell agreement decides whether the survivors buy the family out at a fair price — or inherit a co-owner who never wanted the business. The agreement is the plan; life insurance is the money. Here’s how the structures work, and where IUL fits next to term and whole life.
Who this is for: Partners and co-owners of closely held businesses, and the attorneys and CPAs drafting their agreements.
The two structures
Cross-purchase: each partner owns a policy on the others; at a death, the survivors receive the proceeds and buy the deceased partner’s share personally, getting a stepped-up basis in what they buy. Simple with two or three partners, unwieldy with many. Entity purchase (stock redemption): the business owns a policy on each partner and redeems the deceased’s share; one policy per owner regardless of headcount, but survivors don’t get a basis step-up, and employer-owned policies must follow notice-and-consent and reporting rules for the death benefit to keep its income-tax exclusion. Hybrids and trusteed arrangements exist. The choice is legal and tax work.
Term, permanent, and where IUL fits
Coverage is sized to each owner’s share of the agreed valuation — and revisited as the business grows. Term fits an agreement with a defined horizon, such as a planned sale in ten years; it’s inexpensive and does the job. Permanent coverage fits agreements meant to last a career, and it survives a partner’s later uninsurability. IUL’s place: permanent coverage with cash value that can serve as a business reserve through policy loans, or that funds a lifetime buyout if a partner retires rather than dies. Whole life fits when guarantees matter more than flexibility. Draft the agreement first; fund it second.
The essentials
What actually matters here
Cross-purchase vs. entity purchase
Basis, headcount, and employer-owned-policy rules decide.
Permanent for lifetime agreements
IUL adds a cash reserve; whole life adds guarantees; term fits a defined horizon.
IUL can genuinely fit when…
- A written buy-sell agreement with a valuation method
- Partners insurable at reasonable classes
- Counsel and a CPA choosing the structure
- A plan to revalue and adjust coverage
Slow down when…
- No written agreement exists
- The business would own policies without notice-and-consent paperwork
- Coverage was sized once and never revisited
Straight answers
Questions people actually ask
What is a buy-sell agreement?
A contract among business owners that sets what happens to an owner’s share at death, disability, or departure — who buys it, at what valuation, and how it’s funded. Life insurance is the usual funding for the death trigger: proceeds pay the deceased owner’s family while the survivors keep the business.
Cross-purchase or entity purchase?
Cross-purchase (partners own policies on each other) gives survivors a basis step-up and is simple with few partners. Entity purchase (the business owns the policies) scales to many owners but lacks the step-up and must follow employer-owned policy notice-and-consent and reporting rules to preserve the death benefit’s tax exclusion. Your attorney and CPA choose; this is general information, not legal or tax advice.
Should a buy-sell be funded with term or permanent insurance?
Term for agreements with a defined horizon — cheap and sufficient. Permanent for agreements meant to last a career; it survives later uninsurability and, with IUL, adds a cash-value reserve the business can borrow against or use to fund a retirement buyout. Whole life when guarantees matter most.
Honest, or not at all
See whether IUL actually fits your situation
Tell us a little about your goals and we'll show you the honest picture — including the guaranteed column, the real costs, and whether term or whole life does the job better. We're paid the same either way, which is why we can tell you the truth.
- We compare IUL against the simpler options first
- Illustrations explained line by line, guaranteed column first
- Your information is never sold