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

Student Question:

Hope you’re well and keeping safe. I do have a quick question regarding buy/sell agreement; not clear who would pay the premiums on disability and/or life insurance on the principals and the key employees?
 
Thanks

Emerito


Instructor Response:

Hi Emerito,
 
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.  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. 

How completely does this address your question?

Onward and Upward,

Bruce