Buy-Sell Agreement Funding
Buy-Sell Life Insurance Cost: Structure, Number of Policies and Who Pays
Published October 8, 2026 · Updated October 9, 2026
Key takeaways
- In a cross-purchase structure, each owner buys a policy on every other owner, so the number of policies equals n × (n − 1), where n is the number of owners.
- In an entity-purchase (redemption) structure, the business buys one policy per owner. That means fewer policies, but the business pays every premium.
- Section 264(a)(1) of the Internal Revenue Code allows no deduction for life insurance premiums "if the taxpayer is directly or indirectly a beneficiary under the policy."
- Under section 264(a)(1), neither the owners in a cross-purchase nor the business in an entity purchase deducts the premiums, because the one who pays is the beneficiary of the policy in each.
- Section 101(a)(1) generally excludes the death benefit from gross income. The transfer-for-value rule in section 101(a)(2) and, for employer-owned contracts, section 101(j) limit that exclusion.
- The value placed on each ownership interest sets the face amount needed, and the face amount drives premium cost.
Short Answer: What Drives the Cost of Buy-Sell Life Insurance
The cost of buy-sell life insurance depends mainly on the structure the owners choose, how many policies that structure requires, how large each policy must be and who pays the premiums. Owners pay in a cross-purchase plan, and the business pays in an entity purchase. Section 264(a)(1) of the Internal Revenue Code allows no deduction for premiums when the taxpayer is directly or indirectly a beneficiary under the policy.
Owners of closely held companies usually ask this question when they draft or update a buy-sell agreement. They want to know what funding the buyout obligation will take. Business Life Insurance states no premium figures because rates vary by insurer, by insured and by contract. This page explains the structural drivers of buy sell agreement insurance cost instead.
How Buy-Sell Life Insurance Funding Works
The business problem comes first. When an owner dies, the surviving owners often want to keep control, and the deceased owner's family often wants cash rather than a minority stake in a private company. A buy-sell agreement is a legally binding contract among the owners, and sometimes the business itself, that governs how an ownership interest transfers when a triggering event occurs, such as death.
Life insurance is the funding mechanism, not the agreement. The agreement creates the purchase obligation, and the policy can provide the cash to meet it. A broader overview appears on the site's page on buy-sell life insurance.
Two structures dominate:
- Cross-purchase. Each owner owns and pays for a policy on each other owner. At a death, the surviving owners receive the proceeds and use them to buy the deceased owner's interest.
- Entity purchase (redemption). The business owns and pays for a policy on each owner. At a death, the business receives the proceeds and redeems the deceased owner's interest. To redeem means the entity buys back the interest.
Hybrid and trusteed arrangements also exist, and their mechanics vary. How these arrangements, policy transfers between owners and employer-owned contract notice and consent apply depends on the contracts involved and calls for individual review with a qualified tax professional. The section 264(a)(1) bar on deducting premiums applies in both main structures, because the payer is the beneficiary in each.
Who This Page Is For
This page serves owners of closely held corporations, partnerships, LLCs and professional practices who are weighing a buy-sell agreement or already have one. These readers want to see how the choice of structure changes the number of policies and who bears the premiums. It also serves the finance leads and advisers who support those owners, and readers who want the federal tax treatment of premiums and proceeds in a buyout setting.
Broader questions belong elsewhere. Premium drivers for business coverage in general are covered under business life insurance cost. Key person insurance cost, which concerns coverage protecting the business against the loss of an individual's contribution, is a separate topic on Business Life Insurance.
When Buy-Sell Life Insurance Funding May Fit
Owners commonly consider insurance funding in a few recurring situations:
- A closely held business where an owner's death would leave the survivors without liquid funds to buy the deceased owner's interest.
- An ownership interest that is illiquid, with no ready market of outside buyers.
- Owners who want the purchase price fixed or determinable in advance and want cash available at the moment the obligation arises.
- Partnerships, where section 101(a)(2)(B) excepts a transfer of a policy "to a partner of the insured, to a partnership in which the insured is a partner." That exception may matter when cross-purchase policies change hands. The site's page on life insurance for business partners covers that setting.
These are descriptions of fact patterns. Whether any of them matches a particular business turns on its owners, its value and its agreement.
When Buy-Sell Life Insurance Funding May Not Fit
Complexity rises quickly with headcount. Four owners in a cross-purchase need 4 × (4 − 1) = 12 policies, and each owner has to keep paying on three of them.
Other situations add strain:
- Different ages or health. In a cross-purchase, a younger or healthier owner may carry larger premiums on an older co-owner than that co-owner carries in return.
- Estate valuation. In Connelly v. United States (2024), the Supreme Court held that a corporation's "contractual obligation to redeem [the deceased shareholder's] shares did not diminish the value of those shares" for federal estate tax, where the corporation held the insurance. The Court expressly decided that one question only.
- Uncertain or contested valuation. When owners cannot agree on value, setting a face amount becomes difficult.
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Ownership, Premiums and Beneficiary Mechanics
Each structure assigns the four roles differently: the owner, the insured, the premium payer and the beneficiary.
| Role | Cross-purchase | Entity purchase |
|---|---|---|
| Policy owner | Each owner, on each co-owner | The business |
| Insured | Each co-owner | Each owner |
| Premium payer | The owning owner | The business |
| Beneficiary | The owning owner | The business |
Section 264(a)(1) provides that "No deduction shall be allowed for— (1) Premiums on any life insurance policy, or endowment or annuity contract, if the taxpayer is directly or indirectly a beneficiary under the policy or contract."
In a cross-purchase, each owner pays the premiums on the policies that owner holds. The business neither pays those premiums nor is the beneficiary of the owners' policies on each other. In an entity purchase, the business pays the premiums, and section 264(a)(1) applies because the business is the beneficiary.
The proceeds go to the surviving owners in a cross-purchase or to the business in an entity purchase. Section 101(a)(1) generally excludes those proceeds from gross income, subject to the transfer-for-value and employer-owned contract rules. Trusteed and hybrid arrangements change these roles.
Key Factors That Affect the Cost of Buy-Sell Life Insurance
The question of how much buy sell insurance costs has no single answer, because several factors combine:
- Number of owners. Under a cross-purchase, the number of policies is n × (n − 1). As a hypothetical, 3 owners need 3 × 2 = 6 policies and 4 owners need 4 × 3 = 12 policies.
- Structure. A cross-purchase spreads premiums across individual owners, while an entity purchase concentrates them in the business.
- Face amount. The face amount follows the agreed or formula value of each interest. Business valuation for buy-sell funding is a matter for qualified professionals.
- Age and health. These are underwriting factors that each insurer weighs under its own practices.
- Uneven burden. In a cross-purchase, owners who differ in age or health may pay quite different amounts.
Potential Advantages of Life Insurance as a Buy-Sell Funding Mechanism
Timing is the central structural feature. The proceeds become payable at death, which is the same moment the purchase obligation arises.
Other features include:
- Income-tax treatment of proceeds. Section 101(a)(1) provides that "gross income does not include amounts received ... under a life insurance contract, if such amounts are paid by reason of the death of the insured." That exclusion is subject to the exceptions the statute lists.
- Partnership transfers. Section 101(a)(2)(B) may preserve the exclusion when a policy is transferred to a partner of the insured or to a partnership in which the insured is a partner. Whether it applies depends on the contracts and agreements involved.
- Matched funding. The face amount can be set in advance to track the agreed purchase price, so funding does not depend on borrowing or selling assets after a death.
These are features of the structure. None of them determines how a particular arrangement will be taxed.
Important Considerations: Tax Rules and Structural Risks
Transfer for value. Section 101(a)(2) provides that when a contract is transferred "for a valuable consideration," the exclusion "shall not exceed an amount equal to the sum of the actual value of such consideration and the premiums and other amounts subsequently paid by the transferee."
The limit does not apply in two situations:
- (A) the transferee's basis is determined in whole or in part by reference to the transferor's basis; or
- (B) the transfer is "to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer."
A sale of a policy on one co-owner to another co-owner can fall under this rule unless an exception is met. The site's page on cross-purchase buy-sell agreements discusses these transfers.
Employer-owned contracts. Section 101(j) caps the exclusion for an employer-owned contract at "the sum of the premiums and other amounts paid by the policyholder." The cap lifts only if two conditions are both met:
- a section 101(j)(2) exception applies, either one based on the insured's status or one for amounts paid to the insured's heirs or used to buy an equity interest from them; and
- the employee received written notice and gave written consent before the contract was issued.
Notice and consent alone do not lift the cap, and neither does an exception alone. In an entity purchase, the business owns the policy and is its beneficiary. IRS Notice 2009-48 (A-5) notes that "employee" includes an officer, director and highly compensated employee.
Notice 2009-48 (A-1) states that a contract owned by an entity's owner "for purposes of financing the purchase of an equity interest of another owner" is not employer-owned. Under A-3, for a contract otherwise described in section 101(j)(3), ownership by a partnership or sole proprietorship does not keep it from being employer-owned.
Reporting and premiums. Section 6039I requires an applicable policyholder owning employer-owned contracts issued after the section's enactment to file a return for each year such contracts are owned and to keep records. Section 264(a)(1) still bars a premium deduction in both structures.
When to Review the Buy-Sell Funding Plan
Business events, rather than the calendar alone, usually prompt a review:
- Change in value. If the business grows, the existing face amounts may no longer match the agreed price.
- Change in owners. An owner who joins or leaves changes the number of policies a cross-purchase needs.
- Change in structure. Moving between cross-purchase and entity purchase can involve policy transfers that raise transfer-for-value questions.
- Change in health. Declining health or insurability affects whether coverage can be obtained or kept on the same terms.
- Amendment of the agreement. A new valuation formula or new triggering events call for a fresh look at the funding.
How often owners revisit the funding is a matter for them and their advisers. Business Life Insurance prescribes no schedule.
Example (Hypothetical): Cross-Purchase vs. Entity-Purchase Policy Count and Premium Responsibility
This example is hypothetical. It assumes three equal owners, A, B and C, and an interest for each owner valued at $1,000,000. That figure is an illustration, not a recommended valuation or coverage amount. In a cross-purchase, the two surviving owners are assumed to buy half of the deceased owner's interest each.
Hypothetical cross-purchase
- Policies: 3 × (3 − 1) = 3 × 2 = 6.
- Owner A owns and pays for policies on B and C.
- Owner B owns and pays for policies on A and C.
- Owner C owns and pays for policies on A and B.
- Each policy has a face amount of $500,000, which is half of one $1,000,000 interest, so total coverage is 6 × $500,000 = $3,000,000.
Hypothetical entity purchase
- Policies: 3, one on each owner.
- The business owns all three policies and pays every premium.
- Each policy has a face amount of $1,000,000, so total coverage is 3 × $1,000,000 = $3,000,000.
- Section 264(a)(1) applies to the business's premium payments, because the business is the beneficiary.
The two structures fund the same buyout of a single $1,000,000 interest at one death, and total coverage is $3,000,000 in each. The number of policies, who owns them and who pays the premiums differ. No premium amounts are shown, because rates vary by insurer, by each insured's age and health and by contract type. The example uses round numbers and simplified assumptions, and it does not represent any reader's cost or situation.
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We're your trusted California business life insurance advisor. Call us 7 days a week, or send us a message, to have a real conversation about what your business needs.
Frequently Asked Questions
How many life insurance policies does a buy-sell agreement require?
The number depends on the structure. A cross-purchase uses n × (n − 1) policies, where n is the number of owners, while an entity purchase uses one policy per owner. With three owners, that is six policies under a cross-purchase and three under an entity purchase.
Is the death benefit from a buy-sell life insurance policy taxable?
Section 101(a)(1) generally excludes death proceeds from gross income. In business settings, two limits matter: the transfer-for-value rule in section 101(a)(2), and the section 101(j) cap for employer-owned contracts. How either applies depends on the contracts involved.
Does section 101(j) apply to entity-purchase buy-sell policies?
It may. Section 101(j) applies when the business owns the policy, is its beneficiary and insures an employee, and Notice 2009-48 notes that "employee" includes officers and directors. The cap lifts only if a section 101(j)(2) exception applies and written notice and consent were given before the contract was issued.
Educational information only. Not legal, tax, investment or insurance advice. Product availability and outcomes depend on individual circumstances.