Two partners can build a plumbing company, 15 trucks, and a good reputation over about 20 years, and still have no written plan for a death. In the example, one partner dies suddenly. Within a month the surviving partner has a new co-owner, the late partner's spouse, who has never run a job site, needs income now, and would like to sell. The surviving partner would like to buy that interest and does not have a million dollars sitting around. Nobody did anything wrong. They never decided, in writing and with money behind it, what would happen.

Ep38: key person insurance and buy-sell funding separates two jobs that get blended. This article follows the guide written from that episode. It is not a buy-sell agreement and not a tax opinion. Life insurance context is on life insurance in California.

Bollinsure can review the life insurance that would fund a plan. Your attorney drafts the agreement. Your CPA owns the tax return. Start at Get quoted or call 562-268-9355.

Key person insurance is the business's policy

Key person insurance is the policy the business owns on a person the business depends on. In the setup the episode describes, the business owns the policy, the business pays the premium, and the business is the beneficiary. The death benefit is the business's cash when it loses that person. How much to buy is a sizing question, not a single multiple.

The episode's software-firm example sizes one policy to the person. The co-founder's pay is about $200,000 a year. The $1.5 million policy is about seven times that compensation. Those figures clarify the amount spoken in the episode. They are an example from that conversation, not a multiple that fits every business.

Two tax points come up in the same stretch. The guide says premiums the business pays are not deductible, and that the episode points to Section 264 for that rule. Section 101(j) calls for notice and consent before the policy is issued, and the episode names Form 8925 with that requirement. Those are filing and consent steps to handle with the company's CPA before a policy is put in force. They are not a reason to skip the coverage, and they are not something a podcast can complete for you. Do not treat this paragraph as tax advice.

Key person disability is a separate policy from the life insurance. It has an elimination period, the waiting time that policy uses before a benefit can start. The period is whatever the policy says, not a number this article can fill in.

Buy-sell funding is the ownership job

A buy-sell agreement says what happens to an owner's share. Funding is the money that lets the people who are supposed to buy actually pay. The episode names three ways to hold the policies that provide that money:

  • Cross-purchase. The other owners hold the policies that fund the purchase of a deceased owner's share.
  • Entity redemption. The business holds the policy and uses the proceeds to redeem the ownership interest.
  • Trusteed cross-purchase. A trustee holds the policies. The episode clarifies that the structure discussed about six minutes in is a trusteed cross-purchase.

The plumbing partners in the episode are the funded cross-purchase example: the written agreement and the policies are there so the surviving partner is not left negotiating with a new co-owner and no cash. An attorney drafts the agreement. A life policy can fund it. This page does not draft either one.

Connelly v. United States, decided in June 2024, is why the episode says owners with redemption agreements are reviewing them. What the case means for a particular company's estate tax is a question for that company's CPA and attorney. This article will not tell you the tax result.

Term coverage and permanent coverage are both in the episode. Term is coverage for a defined period. Permanent coverage is built to stay in force. Which one fits depends on how long the obligation lasts. A guide cannot pick the product from the job title alone.

How the price gets set, and why plans fail

The episode covers three ways the agreement can set the price: a fixed number, a formula, or an appraisal. It also covers who pays, including splitting the premium. The price in the agreement and the amount of the policy have to be looked at together. A number chosen years ago, with no one assigned to update it, is how a funded agreement drifts away from the business it was written for.

The failure modes the episode names are practical:

  • A mismatch. The agreement's price and the policy amount are not the same number.
  • The wrong owner or beneficiary. The policy pays the wrong person, or the person who is supposed to buy does not receive the money.
  • A transfer for value. The episode names a transfer for value as a way the plan fails. Check who owns the policy, and who it pays, before the policy changes hands. The tax consequence is a CPA question, not a sentence this page can finish.

Life policies also have standard exclusions. The episode reviews them so a plan is not built on the assumption that every death is paid. Read the exclusions on the policy you are actually considering. The issued policy controls, not the example in the recording.

What to bring

The episode closes with four questions to ask about your own plan this quarter. Start with the recording, then bring the agreement, the policy owner, the beneficiary, and the way the price is set.

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Frequently asked questions

Is key person insurance the same as buy-sell funding?

No. The episode separates them. Key person insurance is the business's cash when it loses someone it depends on. Buy-sell funding is the money that lets the remaining owners pay for the share under a written agreement.

Who owns a key person policy in the episode's example?

The business owns the policy, pays the premium, and is the beneficiary. The software-firm figures, about $200,000 of pay and a $1.5 million policy, are an example, not a multiple for every firm.

Are the premiums deductible?

The guide says the episode points to Section 264 for the rule that premiums the business pays are not deductible, and names Section 101(j) notice and consent plus Form 8925. Confirm that with the company's CPA. This article is not tax advice.

What should I ask an attorney before I buy the policy?

Who must buy, how the price is set, and whether the structure is cross-purchase, entity redemption, or a trusteed cross-purchase. The episode flags Connelly v. United States for owners with redemption agreements. The attorney and the CPA own that review.

Primary Sources and Further Reading

This page is general educational information. It is not legal, tax, or coverage advice. Premium deductibility, notice and consent, transfer for value, and estate tax are questions for the company's CPA and attorney. No coverage is bound through this article.