What does a buy sell agreement actually do?
It is the contract that answers the hardest question in any partnership: if one owner dies or must exit, who buys their share, at what price, and with what money. Without one, a deceased partner's share passes to their estate, which can mean running the business alongside a grieving spouse who never wanted it, or a forced sale.
The agreement itself is drafted by your attorney. What insurance solves is the third question, the money, because the buyout obligation lands at the exact moment the business is most fragile. An agreement that obligates the surviving owners to buy without guaranteeing the funds simply converts a tragedy into a debt.
How does life insurance fund the buyout?
Each owner is insured, and when one dies, the policy benefit provides the cash that purchases their share from the estate at the agreed price. The family gets paid promptly and fairly, the surviving owners get the company cleanly, and no one borrows against a wounded business.
The two classic structures are cross purchase, where owners hold policies on each other and buy the share directly, and entity purchase, where the company holds the policies and redeems the share. Which fits depends on the number of owners, tax considerations your CPA will weigh, and how the agreement is drafted. Recent federal case law has also changed how entity held policies can affect a company's valuation for estate tax purposes, which is exactly why this is a three chair conversation: your attorney, your CPA, and your agent, together. We are comfortable being one of the three chairs and we coordinate happily with the other two.
What does it cost, and when should partners set it up?
Cost depends on each owner's age, health, and the coverage amounts the valuation demands, with term insurance typically doing the job affordably during the years the partnership needs protection. The right time is now, while every partner is insurable, because one diagnosis can make the whole structure impossible.
The pattern we see repeatedly: partners agree the buy sell matters, park it behind urgent work, and revisit it only when someone's health changes, at which point coverage is expensive or unavailable and the options narrow to bad ones. An hour with real numbers settles it. We run the comparison across companies, and the policies get owned exactly as the agreement specifies.