Don’t worry, we don’t sell life insurance. We empower our clients to think strategically about insurance and give them the tools to evaluate the benefits and drawbacks of different types of policies and how they might approach insurance as a financial solution tailored to their needs. From financial planning, income and estate tax planning, asset protection, charitable planning, or even business planning, there is a lot to consider.
As a business owner, you juggle countless responsibilities, many of which rest solely on your shoulders. With so much, and so many people, depending on you, how prepared are you for the unexpected? Business owner life insurance isn’t just about protecting your loved ones, it can play a crucial role in the foundational future of your business.
Business Insurance vs. Business Owner Life Insurance
According to a 2025 survey , 92% of small businesses have some type of insurance but only 13% of small business owners with coverage feel fully prepared for unexpected risks. This low percentage could be attributed to low confidence or lack of understanding of the different types of insurance that a business owner may need. While many businesses carry coverage such as general liability, worker’s compensation, or professional liability, many small business owners fail to secure life and disability insurance that would allow for a smoother business transition and provide for the key persons family’s needs after death or disability.
Business Partner or Key Employee Insurance
You may have a business partner or a key employee without whom the company would struggle to continue. Business Partner or Key employee insurance is designed to protect your business if your business partner or key employee passes away or becomes disabled. In a typical arrangement, the business owns the policy and is the policy’s beneficiary, providing much needed funds to mitigate financial losses and keep operations running smoothly if the business partner or key employee dies or becomes disabled.
Premiums for key employee insurance are generally not tax-deductible to the business resulting in tax-free death benefit proceeds received by business. This provides for a larger after-tax benefit to the business with more funding to mitigate financial losses and affords the business more time to continue operations as it transitions. Additionally, if the business partner insurance is set up in connection with a Buy-Sell Agreement, it provides a valuable source of tax-free liquidity that can be used to transition ownership and streamline estate and probate complexities that may arise.
Buy-Sell Agreement
When a business has multiple owners, implementing and funding a Buy-Sell Agreement with life insurance can help assure the continuity of a business and avoid negative impacts on working capital and/or debt loads if the unimaginable happens. If one partner dies or becomes disabled, a Buy-Sell Agreement funded with life insurance allows the business or its remaining partners to purchase the deceased or disabled owner’s ownership share on pre-agreed terms that take into account owner liquidity needs, valuation methodologies, payment terms, and a variety of other management and control issues. Buy-Sell Agreements can be funded with either term policies or whole life policies depending on business owner needs.
Let’s take a look at the two most common structures for business owner life insurance: A Cross Purchase Agreement and a Business Entity Purchase Agreement.
Cross-Purchase Agreement
With a Cross-Purchase Agreement, business owners enter into an agreement providing that upon the death of any business owner, each surviving owner will purchase the business interests of a deceased owner. Each business owner then secures a life insurance policy on the other owners that pays a death benefit individually to the surviving owners upon the death of a co-owner. The surviving owners then use the death benefit proceeds to buy the business interest from the estate of the deceased owner.
Benefits of a Cross-Purchase Agreement include:
- Additional source of liquidity
- Tax Free Death Benefit to the survivor (IRC Section 101)
- Stepped-up basis in the acquired business interest that lowers any future gain if the interest is later sold (IRC Section 1012)
- Business creditor protection
- Surviving owners can buy the deceased owner’s business interest in unequal amounts
Drawbacks of a Cross-Purchase Agreement include:
- Multiple policies on each owner creating administrative complexities
- Inequity in premiums due to owner ages and health ratings
- Premiums paid are not tax deductible (IRC Section 264(a)(1))
Business Entity Purchase Agreement
With a Business Entity Purchase Agreement, the business owners and the business enter into an agreement that provides that the business entity will purchase the deceased business owner’s interest. The business, not the individual owners, secures a life insurance policy on each of the business owners that pays the business death benefits that can subsequently used to buy the deceased business owners’ interest from their estate.
Benefits of a Business Entity Purchase Agreement include:
- Additional source of liquidity
- Tax Free Death Benefit to the business (IRC Section 101)
- A single insurance policy on each business owner
- Perceived equity in premium payments due to owner ages and health ratings that are spread out among all owners
Drawbacks of a Business Entity Purchase Agreement include:
- Premiums paid are not tax deductible (IRC Section 264(a)(1))
- Lack of creditor protection from business creditors
- Complexity for surviving owners to get a stepped-up basis in acquired ownership
- Inability to designate percentages of ownership acquired, which could result in unintended shifts in control
- Transfer of the policy from the business to the insured if the buy-sell is terminated can be a taxable event
- The death benefit proceeds may increase the estate tax value of the deceased business-owners interest (Connelly v. United States, 602 U.S. 257 (2024)).
We’re Here to Help
At FCA Corp, we work with business owner clients to help determine which insurance is right for their unique needs. Our team is well-equipped to help you analyze your existing insurance policies and offer recommendations that align with your financial goals to help ensure your family, business and wealth are protected today and in the future. Contact us today to get started.
