A buy-sell agreement can set out how an ownership interest may transfer after a defined event. Life insurance is sometimes considered as a funding source, but the agreement—not the policy—sets the owners’ rights and obligations.
Start with the event and the agreement
Owners and counsel should identify the events that could trigger a transfer, such as death, disability, retirement, a voluntary sale or a dispute. The agreement needs to explain who may buy or must sell, how the interest is valued, how a transfer is completed and what deadlines apply.
Decide how value will be determined
Business value can change. The agreement may use a formula, a periodic valuation, an appraisal process or another method chosen with legal and accounting advice. Ask how the method works if the owners disagree or if the company changes substantially between reviews.
Compare the funding plan with the agreement
Owners may explore insurance, cash reserves, installment payments, borrowing or a combination. Each option has different timing, cost and liquidity implications. If life insurance is considered, the proposed insureds, owners, premium payers and beneficiaries must align with the legal and business design.
Review changes before they become urgent
Ownership, business value, debt, staffing and policy terms change. Set a regular review date and revisit the documents after a major business change. Do not assume a policy automatically adjusts when an agreement changes.
Questions for the legal, tax and insurance teams
- Which events trigger a purchase or sale, and who has the right or duty to act?
- How is the ownership interest valued and when is that value updated?
- Who owns each policy, pays premiums and receives any proceeds?
- Does the agreement explain what happens if coverage is unavailable or insufficient?
- How should the owners coordinate tax, legal, lending and insurance reviews?
The SBA’s business management guidance recommends planning ahead for ownership transfers and getting qualified legal, tax and valuation advice. For proposed coverage, review the actual policy contract and compare it with the written agreement. This guide is general education, not a legal or tax recommendation.
Make the documents work as one plan
Keep an accessible record of the current agreement, valuation method, policy details, responsible contacts and next review date. Then ask the professionals who maintain each document to confirm the pieces still fit together.
Related: Map the roles and decisions the business depends on →