Buy-Sell Agreement Life Insurance: Structure, Size and Cost

When a co-owner dies, their share passes to their estate, and the survivors are suddenly in business with a grieving spouse who has no interest in the company, or an heir who has opinions. A buy-sell agreement settles in advance who buys the share, at what price and on what terms. Life insurance is how most small businesses make sure the money is there when it is needed.

This guide covers what the agreement does, the two ways to structure the policies, how to size them, why term usually fits, how to keep valuation and coverage aligned, and what to have ready. We write the policies; your attorney writes the agreement, and your CPA picks the structure for your entity.

What does a buy-sell agreement do when an owner dies?

A buy-sell agreement is a contract among the owners, and often the company, that says what happens to an owner's interest on a triggering event: death, disability, retirement, divorce or departure. For death, it obligates the estate to sell and the buyer to buy, so neither side can walk away; sets the price by a fixed figure, a formula or an appraisal; and names the payment terms and the funding source.

Without funding, the agreement is a promise to pay a price nobody has: the survivors borrow, if a bank will lend to a company that just lost a principal, or pay the family in installments over years. Life insurance solves this because the death benefit arrives as a lump sum, income-tax-free in the typical case, within weeks of the claim. The family is paid in full, and the survivors own the whole company.

Cross-purchase vs entity purchase: which structure fits your business?

The policies can be arranged two ways, and the agreement must match whichever you choose.

Cross-purchase. Each owner personally owns, pays for and is the beneficiary of a policy on each of the other owners. When one dies, the others collect and buy the share from the estate. Two owners need two policies; three need six, four need twelve, and every change in ownership means new policies.

Entity purchase, also called a redemption. The company owns, pays for and is the beneficiary of one policy on each owner. When an owner dies, the company collects and redeems the share, and the survivors' percentages rise automatically. One policy per owner, however many there are.

Three factors decide it in practice.

Count. Beyond three owners, cross-purchase becomes a paperwork problem, and entity purchase is the default. Some advisers use a trust or an LLC to hold cross-purchase policies and cut the count; ask your attorney.

Age and health gaps. In a cross-purchase, the healthy 40-year-old pays the premium on the 50-year-old partner and the 50-year-old pays the cheap one: $163 a month against $63 for $1,000,000 of 10-year term. Entity purchase runs the cost through the company, shared in proportion to ownership.

Tax basis and estate value. Cross-purchase gives survivors a higher basis in the shares they buy, which can mean less tax when they sell; entity purchase generally does not. In 2024 the Supreme Court held in Connelly v. United States that insurance proceeds a company holds to fund a redemption count toward its value for estate tax purposes, which can raise the estate tax for owners with larger estates. Which matters depends on your entity type and estate; that is what your CPA and attorney are for.

Company-owned policies on owner-employees also need the notice and consent described in our guide to key person life insurance, signed before the policy is issued.

How much life insurance does a buy-sell agreement need?

Each owner's coverage equals that owner's share of the agreed business value, because that is the price someone is obligated to pay. Take a business valued at $2,000,000:

• Two owners at 50 percent each: $1,000,000 of coverage on each.
• Three owners at 50, 25 and 25 percent: $1,000,000 on the majority owner and $500,000 on each of the others. Under a cross-purchase, each survivor insures the portion they must buy.

Round up rather than down; valuations lag, and a business worth $2,000,000 at signing is often worth more by the time a policy pays. Nectar Term is issued from $100,000 to $3,000,000 per policy; if an owner's share is larger, agreements typically fund the balance with a promissory note. Every dollar of this policy buys the business, so the owners' families still need their own coverage.

Should a buy-sell agreement use term or permanent life insurance?

Term fits most agreements because most agreements have a horizon: the owners plan to sell in ten years, or the senior partner plans to retire at 62. A 10-, 15- or 20-year term covers that window at the lowest cost per dollar of benefit, which matters because premiums are paid with after-tax money.

Permanent insurance is used when the obligation has no end date or the agreement also funds a lifetime buyout: a family business meant to stay private for another generation, owners already past 60 (our issue ages run from 20 to 60), or an agreement that will use a policy's cash value to buy out a retiring owner. It costs several times more for the same death benefit, and we do not sell it; our guide to term vs whole life insurance explains the difference.

Term prices for two owners, from our rate table ($500,000 of 20-year coverage, preferred non-tobacco: $47 a month at 40 and $122 at 50 for a man), with $1,000,000 at about 1.85 times that and a 10-year term about 28 percent less:

• $1,000,000 of 10-year term: an estimated $63 a month at 40 and $163 at 50.
• $1,000,000 of 20-year term: an estimated $87 a month at 40 and $226 at 50.
• Women pay about 18 percent less: roughly $51 and $133 for the 10-year policies.

These are estimates for the preferred class, set during underwriting; the standard class typically costs 40 to 50 percent more. The full table is in our pricing by age section, and our term life insurance cost guide explains each input.

How do you keep the valuation and the coverage in step?

This is where agreements fail quietly. The owners sign, buy the policies and do not look again for eight years, while the business triples. Then an owner dies, the formula produces a $6,000,000 price, and the insurance pays $2,000,000.

• Put a review date in the agreement. Once a year, the owners confirm or update the value and compare it with the policies in force.
• Add coverage; do not replace it. When the value rises, add a second policy for the difference; the first was priced at a younger age.
• Say what happens to a mismatch. The agreement should state who keeps any insurance above the price (usually the buyer) and how a shortfall is paid (usually a note over a few years).

The policies have to match the agreement. If the agreement says cross-purchase and the company owns the policies, or a departed owner is still a beneficiary, the death benefit arrives in the wrong hands on the worst possible day. Check owner, payer and beneficiary at every review.

What to have ready, and when to call the attorney and CPA

Call the attorney first if there is no agreement yet; the policies are only useful once a contract says who buys and at what price. If an agreement exists, find three things in it:

1. The valuation clause. A fixed price, a formula (often a multiple of revenue or earnings) or an appraisal at death.
2. Ownership percentages. Current ones, not the ones from formation. Value times percentage is each policy amount.
3. The structure. Cross-purchase, entity purchase or a hybrid that lets the parties choose at the time; it decides who applies as owner and who is beneficiary.

The application needs each insured owner's date of birth, height, weight, medications and doctor's name, and, for an entity purchase, the company's legal name and tax ID. Most healthy owners under 60 qualify for up to $2,000,000 without a medical exam; our guide to whether you need a medical exam covers who does. Your CPA checks the basis and notice-and-consent points for your entity, and the IRS site has the forms. Once the amounts are settled, each owner can see their estimated price, with approval odds and decision time shown before applying.

Nectar Term policies are issued by Nectar's partner insurers, each rated A or better by A.M. Best, and serviced by Nectar. Prices in this article are estimates calibrated to published 2026 averages and are not an offer of coverage. Final rates are set during underwriting.

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