Life Insurance in a Cross-Purchase Buy-Sell Agreement

Course: Insurance Planning
Lesson 17: Business Uses of Life and Disability Insurance

Student Question:

I have a quick question regarding buy/sell agreement. I’m not clear on who would pay the premiums on disability and or life insurance on the principals and the key employees?


Instructor Response:

Great question.  A buy-sell agreement relates to owners of the business while a Key Person policy can relate to non-owners as well.

Life Insurance in a Cross-Purchase Buy-Sell Agreement

Let’s begin with a buy-sell agreement funded using life insurance in a cross-purchase arrangement.  If we assume three owners, named Able, Bob, and Cain:

  • Able purchases and owns individual life insurance policies on Bob’s and Cain’s life. 
  • Bob purchases and owns individual life insurance policies on Able’s and Cain’s life.
  • Cain purchases and owns individual life insurance policies on Able’s and Bob’s life.  
  • Each shareholder pays the premiums from personal funds on the policies he owns on the lives of the other two shareholders.  
  • The premiums are non-deductible, and the death benefit is income tax free. 

Disability buy-out insurance in a Cross-Purchase Buy-Sell Agreement
If disability were also funded as part of the buy-sell agreement, a cross-purchase policy structure would be same as the life insurance example above.  The taxation would also be the same, the premiums are non-deductible and the policy benefits would generally be received income-tax free.

Key Person Insurance
This policy would not generally be part of a buy-sell agreement.  The business itself would generally own a Key Person Policy.   Premiums are paid by the business and are non-deductible.  Death benefits are generally income tax-free.