A buy-sell agreement funded with life insurance can be the difference between a smooth business transition and financial chaos.
The good news? We offer coverage to help you run smoothly with great life insurance companies that understand buy-sell underwriting.
What Is a Buy-Sell Agreement in Life Insurance?
A buy-sell agreement is a legal contract between co-owners of a business. It outlines how an owner’s interest will be transferred if they die, retire, become disabled, or otherwise leave the company. Without a funding mechanism, though, even the best-written agreement can fall apart.
That’s where business life insurance comes in.
With buy-sell life insurance, a policy is placed on each owner. If one dies, the proceeds are paid to the company as beneficiary and used to buyout the deceased owner’ share. This guarantees:
- The surviving owners can afford the buyout
- The deceased owner’s family gets a fair payout
- Business continuity is preserved
Buy-sell life insurance supports the business, protects the owners’ investments, and avoids cash flow disruptions.
Two Types of Structures
The two types of Buy-Sell agreements are:
Cross-Purchase Buy-Sell
- Each owner buys a policy on the others
- Best for partnerships, LLCs, and S-Corps with few owners
- Provides a step-up in basis to the surviving owners
Entity Purchase Buy-Sell
- The business owns and pays for policies.
- Simpler with multiple owners—only one policy per person
- No step-up in cost basis for the business owners
Number of policies needed for Cross-Purchase
- Formula = n(n-1) “n” is the number of owners
- 2 Owners: 2(2-1) = 2 policies needed
- 3 Owners: 3(3-1) = 6 policies needed
- 4 Owners: 4(4-1) = 12 policies needed
- 5 Owners: 5(5-1) = 20 policies needed
Number of policies needed for Entity Purchase
- Number of policies = number of owners
- 2 owners = 2 policies
- 3 owners = 3 policies
- 4 owners = 4 policies
- 5 owners = 5 policies
As you can see, an entity purchase plan will require fewer policies for three or more owners than a cross-purchase plan, and save you substantial premiums.
Both are valid strategies. The choice depends on your entity type, tax objectives, and the number of owners involved.
How Buy-Sell Agreements Affect Life Insurance Underwriting
Underwriting for buy-sell coverage involves two areas: personal and business.
Personal Underwriting
- Insured owners must qualify based on age, health, family history, and lifestyle
- Medical exams or accelerated underwriting may be required
- Premiums vary based on the rate class (E.g., Preferred, Standard).
- Riders and living benefits also affect the pricing.
Business Justification
- Coverage amounts must match each owner’s share of business value
- A formal buy-sell agreement is required
- Underwriters often request financials (balance sheets, income statements) and ownership details.
Important: An insurable interest exists between business co-owners, but it must be documented through a written agreement or plan.
Underwriting Questions for Buy-Sell Life Insurance
Expect questions like:
- What is your ownership percentage?
- What is the current valuation of the business?
- Do you have a written buy-sell agreement?
- Is this a cross-purchase or entity redemption arrangement?
- What is your role and annual income from the business?
- Who will own and pay for the policy?
- Are there other insured parties under this arrangement?
Insurers may also request:
- Financial statements (past 2–3 years)
- Entity type (S-corp, LLC, etc.)
- CPA letter verifying valuation, if a formal appraisal isn’t available
Policy Options and Sample Pricing
Most buy-sell agreements are funded using term life insurance, since coverage is often only needed during active ownership years. However, universal life or whole life insurance may be appropriate if:
- The owners are older and want guaranteed lifetime coverage
- There’s a plan to build cash value for future buyouts
- The buy-sell agreement will remain in place indefinitely
- They may be able to use the policies in the future as part of retirement planning.
Table ratings apply if one or more owners have health concerns—this increases premiums.
Real-World Pricing Example – Cross Purchase vs. Entity Purchase
We’ll create a simple example using three 45-year-old men, all in excellent health, who have decided to purchase $1,000,000 of 20-year term life insurance.
The preferred best rate is $990 per year.
Under a cross-purchase plan, they would buy six policies in total, costing $ 5,940 annually (6 x $990).
Under an entity purchase plan, they would buy three policies, costing $ 2,970 annually (3 x $990).
Best Life Insurance Companies for Buy-Sell Agreements
Here are several strong options based on underwriting flexibility, financial strength, and business.
Lincoln Financial
- Excellent for entity purchase structures
- Level term or convertible term available
- Streamlined underwriting with no labs for eligible clients
- Strong financial ratings and e-delivery options
Prudential
- Offers both cross-purchase and entity-redemption strategies
- Robust legal and tax insights are available through their Advanced Planning team
- Competitive for higher-risk applicants or older owners
- Policies structured to avoid “transfer-for-value” and estate tax issues
Protective Life
- Very affordable term rates
- Easy policy ownership assignments for business use
- Suitable for younger, healthy owners looking for cost efficiency.
Pacific Life
- Known for flexible permanent life solutions
- Offers indexed UL and GUL products for long-term needs
- Strong support for business continuation planning
Banner Life
- Fast digital application process
- Accelerated underwriting for qualifying applicants up to $2M
- Good fit for cross-purchase plans with minimal friction
FAQ – Life Insurance for Buy-Sell Agreements
Yes. Key person coverage protects the business from the financial impact of losing a key employee or owner. Buy-sell coverage funds a legal agreement to transfer ownership.
Usually 3–6 weeks. Faster if you qualify for accelerated underwriting (some carriers offer no-exam approvals up to $7 million).
New businesses can still qualify, but insurers will look at your projections, ownership, and personal finances. A well-drafted agreement is essential.
Yes. In an entity purchase plan, the business is both the owner and the beneficiary. In a cross-purchase plan, each owner holds the policy on the others.
Final Thoughts
If your business has more than one owner, a buy-sell agreement backed by life insurance isn’t optional; it’s essential. With the right strategy, you can lock in affordable coverage that protects your investment, your family, and your company’s future.
Whether you choose an entity purchase or a cross-purchase setup, ensure that the life insurance is structured, funded, and adequately documented.
We can help guide you to the best policy for your situation.
Request your life insurance quote today.
