Buy-sell agreement life insurance funds a legal arrangement between business partners or shareholders that governs what happens to a business interest when an owner dies, becomes disabled, or otherwise exits the business. Life insurance provides the liquidity needed to execute the agreement — the death benefit funds the purchase of the deceased owner's share from their estate, ensuring a smooth ownership transition without financial strain on the surviving owners or the business.
There are two primary types of buy-sell arrangements funded by life insurance. In a cross-purchase agreement, each owner purchases a policy on the life of the other owners and uses the death benefit to buy the deceased owner's share. In an entity-purchase (or stock redemption) agreement, the business itself owns the policies and buys back the deceased owner's share. The choice between these structures has significant tax and legal implications that should be discussed with a qualified attorney and tax advisor.
The coverage amount for each policy should reflect the owner's share of the business value, which should be established through a formal business valuation. The buy-sell agreement itself should specify the valuation method — whether a fixed price, a formula-based approach, or a third-party appraisal at the time of the triggering event. Regular reviews and updates are essential as business values change over time.
Without a funded buy-sell agreement, the death of a business owner can create serious problems: the estate may be unable to sell the business interest, surviving owners may lack funds to buy out the estate, and the business may face operational disruption. A licensed agent in our network can help Tennessee business owners explore life insurance options for funding buy-sell agreements.