Insurance Curator When high-net-worth (HNW) owner-managers in the United States plan business succession, funding a buy-sell agreement with life insurance is often the most practical, tax-efficient way to preserve continuity, pay fair value to departing owners, and protect family wealth. This article walks through best practices, real-world considerations for key U.S. markets (New York City, Los Angeles, Chicago, Houston), insurers and pricing realities, and steps to align policy design with your succession goals.
Why life insurance is the go-to funding vehicle for buy-sells
Life insurance provides three core advantages for buy-sell funding:
- Immediate, liquid cash at the moment of a triggering event (death or disability).
- Predictable pricing and underwriting that allow pricing-in funding needs years ahead.
- Customizable ownership and beneficiary structures to match cross-purchase, entity-purchase, or hybrid agreements.
These benefits are particularly important for HNW owner-managed firms where illiquid business value, estate tax exposure, and family governance intersect.
Sources for federal tax context: see the IRS overview of estate and gift taxes for current exemption levels and filing rules. https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes
Core funding structures: which fits your business?
| Funding Structure | How it works | Best for | Key advantages | Key drawbacks |
|---|---|---|---|---|
| Cross-purchase | Remaining owners buy the deceased owner’s interest using proceeds from policies each owner owns on each other owner | Small number of owners; individual ownership preference | Direct owner-to-owner transfer; potential basis step-up for buyer | Requires N*(N-1) policies; complex if many owners |
| Entity-purchase (stock redemption) | The business owns the policies and buys back the deceased owner’s shares | Corporations or closely-held firms with many owners | Simpler administration; one policy per owner | No basis step-up for buyer (buyer = entity); possible tax complications |
| Hybrid / Wait-and-See | Combination that allows flexibility post-trigger; often uses entity-owned policies with options for cross-purchase | Firms with uncertain buyer pool or family governance issues | Flexibility; can optimize tax/outcome after valuation | More complex drafting and contingencies needed |
(For a deeper comparison: Cross-Purchase vs Entity-Purchase: Which Insurance-Funded Buy-Sell Works for Your Business?)
Policy choices for buy-sell funding: single life, survivorship, term, or permanent
- Single-life term: Low cost, ideal for short-term or interim funding objectives.
- Single-life permanent (UL, IUL, whole life): Higher cost but permanent protection—good when the buy-sell event could occur many years out.
- Survivorship (second-to-die): Pays at second death; commonly used where the buyer is the deceased owner’s spouse or for estate liquidity (less common for a straight buy-sell unless estate liquidity is the goal).
Compare typical uses:
- HNW owners with lengthy succession timelines often prefer permanent or indexed universal life (IUL) because of lifetime coverage and potential cash value utility.
- Younger co-owners with low-cost needs may opt for term to fund buy-outs while ongoing business value is low.
For a focused comparison: Using Survivorship vs Single-Life Policies for Business Succession Funding: Comparative Analysis
Pricing reality: sample ranges, insurers, and large-case capacity
Life insurance pricing varies by insurer, age, gender, health class, face amount, policy type, and underwriting. HNW buy-sell funding is often in jumbo face amounts ($2M–$50M), requiring carriers with large-case teams and reinsurance capacity.
Representative carriers with strong large-case programs:
- New York Life (large-case whole life and survivorship)
- Northwestern Mutual (permanent solutions and large-case underwriting)
- MassMutual / Haven Life (term and large-case UL)
- Prudential, John Hancock (large-case UL, IUL)
- Reinsurers backing large-capacity: Swiss Re, Munich Re, Hannover Re
Estimated pricing—example methodology (use as illustrative only):
- Policy cost data from consumer aggregators can be scaled to estimate large-case costs. For example, Policygenius provides sample term premiums for standard-risk lives; you can scale those for larger face amounts as a rough check. See sample cost guidance: https://www.policygenius.com/life-insurance/how-much-life-insurance-costs/
- Typical premium ranges (illustrative estimates):
- $2M 20-year term for a healthy 40-year-old male: roughly $100–$200/month (varies; multiply sample $500k quote by 4).
- $5M permanent (IUL or survivorship) for a 55-year-old couple: annual premiums commonly range from tens of thousands to low six-figures—dependent on design and underwriting.
- Private Placement Life Insurance (PPLI) and jumbo permanent cases: minimum premiums commonly start at $2M–$5M and are structured by specialty brokers and private banks. Investopedia overview: https://www.investopedia.com/terms/p/private-placement-life-insurance.asp
Because large-case pricing and underwriting vary materially by insurer and individual risk, obtaining competitive large-case illustrations from multiple carriers (including reinsurance-backed offers) is essential.
Premium financing: when leverage improves succession outcomes
Premium financing (borrowing to pay insurance premiums) can be a powerful tool for HNW owners to:
- Preserve liquidity for business operations.
- Acquire larger face amounts with limited personal outlay.
- Potentially improve estate tax outcomes by removing policy assets from the personal estate when structured properly.
However, premium financing adds complexity: loan interest risk, lender covenants, margin calls, and the need for solid collateral and exit strategies. Typical premium financing providers include private banks and wealth management divisions of major banks (e.g., Bank of America Private Bank, J.P. Morgan Private Bank) and specialty lenders. For deeper mechanics and when to use leverage: Premium Financing for Buy-Sell Policies: When Leverage Enhances Succession Outcomes
Drafting and coordination: legal, tax, and valuation alignment
Key drafting points to align insurance with succession reality:
- Trigger definitions: death, disability, retirement, involuntary termination—each should clearly trigger buyout valuation and funding mechanics.
- Valuation methodology and triggers: fixed formula vs. periodic appraisal; align triggers with policy face amounts to avoid under- or over-insurance. See: Valuation Triggers and Insurance Coverage: Aligning Policy Design with Succession Events
- Tax coordination: entity ownership vs. cross-purchase changes income tax basis and estate tax outcomes—coordinate with estate counsel. See discussion: Tax Implications of Insurance-Funded Buy-Sells: Basis, Step-Up, and Estate Considerations
- Family governance: integrate buy-sell insurance with succession governance to avoid intrafamily disputes. See: Coordinating Buy-Sell Insurance with Family Governance and Intra-Family Transfers
Practical implementation checklist (for firms in NYC, Los Angeles, Chicago, Houston)
- Confirm the buy-sell trigger events and valuation method in the agreement.
- Determine funding gap: how much cash would the buyer(s) need to acquire the interest at an agreed price?
- Choose the funding structure (cross-purchase vs entity) based on ownership count, tax goals, and transfer mechanics.
- Select policy type(s) that match horizon and liquidity needs (term for short horizon; permanent/IUL/survivorship for long-horizon and estate liquidity).
- Solicit large-case quotes from 3–4 carriers with large-case teams (e.g., New York Life, MassMutual, Northwestern Mutual, Prudential).
- Evaluate premium financing only after firmwide capital and lender covenants are understood; involve private bank lenders early.
- Coordinate with valuation experts, tax attorneys, and estate counsel to ensure basis, step-up, and estate planning align with policy ownership.
- Perform an annual policy review as company value and owner circumstances change.
Common pitfalls to avoid
- Under-insuring because you used an outdated business valuation.
- Failing to account for state-level estate taxes (several states impose estate taxes with lower exemptions than federal).
- Not updating agreements after ownership changes (new owners may not be covered).
- Ignoring premium financing risks—interest-rate exposure and lender covenants.
Conclusion
For HNW owner-managed businesses across U.S. markets—New York City, Los Angeles, Chicago, Houston—life insurance remains the most reliable mechanism to fund buy-sell agreements. Success depends on careful alignment of policy type, ownership structure, valuation triggers, and tax planning. Work with experienced large-case brokers, tax counsel, and private bank lenders to secure the optimal carrier and design; the right design protects business continuity, achieves equitable liquidity for estates, and preserves generational wealth.
External resources and further reading:
- IRS Estate & Gift Taxes: https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes
- Policygenius — How much life insurance costs (sample pricing and methodology): https://www.policygenius.com/life-insurance/how-much-life-insurance-costs/
- Investopedia — Private Placement Life Insurance overview: https://www.investopedia.com/terms/p/private-placement-life-insurance.asp
Related topics from this series: