Calculate life insurance funding for a buy-sell agreement based on business valuation, number of partners, and ownership percentages.
A buy-sell agreement is a legally binding contract between business co-owners that outlines what happens to an owner's share if they die, become disabled, or leave the business. Life insurance is the most common funding mechanism for these agreements, ensuring that surviving owners have immediate cash to purchase the departing owner's share.
This calculator helps determine the amount of life insurance needed based on the total business valuation, each partner's ownership percentage, and the chosen agreement structure — cross-purchase or entity purchase. In a cross-purchase, each partner buys a policy on every other partner. In an entity purchase, the business buys one policy on each partner.
This is an educational estimate only, not an actual insurance quote or legal advice. Consult a business attorney, CPA, and licensed insurance professional to structure your buy-sell agreement properly. Whether you are a beginner or experienced professional, this free online tool provides instant, reliable results without manual computation.
Without proper funding, a buy-sell agreement is just a promise on paper. Life insurance guarantees that cash is available exactly when it's needed — at the owner's death. This prevents the surviving owners from having to take on debt, sell assets, or bring in unwanted outside investors to buy the deceased partner's share.
Each Partner's Buyout Amount = Business Valuation × Ownership % Cross-Purchase: Each partner needs policies on every other partner equal to their buyout amounts. Total policies = n × (n-1) Entity Purchase: Business needs one policy per partner. Total policies = n
Result: $800,000 / $700,000 / $500,000
Business valued at $2M with 3 partners owning 40%, 35%, and 25%. Buyout amounts: $800,000, $700,000, $500,000. Cross-purchase requires 6 policies (3 × 2). Entity purchase requires 3 policies.
An unfunded buy-sell agreement leaves surviving owners scrambling for cash during an already difficult time. Life insurance is the most reliable funding mechanism because it provides an immediate lump sum precisely when the triggering event occurs. Banks, self-funding, and sinking funds all have limitations that insurance overcomes.
Cross-purchase agreements work best for businesses with 2-3 owners. Each owner individually purchases and owns policies on the other owners. The primary advantage is a stepped-up cost basis for the purchasing owner's increased share. Entity purchase simplifies administration (the business owns all policies) but doesn't provide the same tax benefit.
Business valuations change over time, so insurance coverage must keep pace. Include a provision in your buy-sell agreement requiring periodic valuation updates (annually or biannually) and corresponding adjustments to insurance coverage. Some policies include guaranteed insurability riders that allow coverage increases without new underwriting.
A buy-sell agreement is a contract between business co-owners that establishes the terms under which an owner's interest can or must be sold — typically triggered by death, disability, retirement, or departure. It ensures orderly ownership transition.
In a cross-purchase agreement, each owner buys a life insurance policy on every other owner. In an entity purchase, the business itself buys one policy on each owner. Cross-purchase provides tax advantages (stepped-up basis) but requires more policies with more partners.
The formula is n × (n-1), where n is the number of partners. Two partners need 2 policies, three partners need 6, four partners need 12. This complexity is why entity purchase or trusteed arrangements become popular with more owners.
Common methods include multiple of earnings (EBITDA), book value, revenue multiples, or an independent appraisal. The agreement should specify the valuation method and require periodic updates to keep coverage aligned with business value.
Term life works well when the agreement has a defined timeframe (e.g., until retirement at 65). Permanent life ensures coverage regardless of how long the partnership lasts and can build cash value. Many businesses use a combination.
If the insurance proceeds don't cover the full buyout amount, the surviving owners or business may need to finance the balance through installment payments, a promissory note, or other funding sources. Keeping coverage updated prevents this scenario.
No. Premiums for buy-sell life insurance are not tax-deductible, regardless of whether it's a cross-purchase or entity purchase arrangement. However, the death benefit proceeds are generally received income-tax-free.