Should the business or the individual owners own the policies?

It depends on the structure of your agreement, and after the 2024 Connelly decision the answer carries more tax weight than it used to. In a cross purchase, each owner buys and owns coverage on the other owners and collects the death benefit personally, which keeps the money off the company's balance sheet. In an entity redemption, the company owns the policies and collects the proceeds, which is simpler to administer but can raise the value of the deceased owner's shares for estate tax purposes. With three or more owners, a cross purchase gets unwieldy quickly, so some families use an insurance limited liability company to hold the policies. Decide this with your attorney and CPA rather than defaulting to whichever is easiest to set up.

Is term or permanent coverage better for a succession plan?

They do different jobs and many plans use both. Term coverage is efficient when the need has an end date, such as a ten year installment buyout, a bank covenant, or the years until a successor is ready. Permanent coverage fits needs that do not expire, including estate tax liquidity at an unknown date, evening out inheritances among children, and funding a lifetime transfer. Permanent coverage also builds cash value that can typically be accessed through policy loans while the owner is living, which term cannot do. The right mix follows from the timeline in your agreement.

What happens if one owner cannot qualify for coverage?

It happens, and it does not end the plan. Options generally include a rated policy at a higher premium, a smaller death benefit paired with an installment note for the balance, a sinking fund the company builds over time, or a guaranteed issue product where available. Some agreements also provide for a longer payout period when the funding is partial. The important step is to write the shortfall into the agreement rather than assume the surviving owners will find the money. Underwriting outcomes vary by carrier, so it is worth shopping the case before anyone concludes it cannot be covered.

Are the death benefit proceeds taxable to the business?

Life insurance death benefits are generally received income tax free, but there are traps worth knowing. Employer owned policies must satisfy the notice and consent requirements of Internal Revenue Code section 101(j) or the proceeds can lose that treatment, so the paperwork has to be done before the policy is issued. Proceeds received by a C corporation can also factor into the corporate alternative minimum tax in some cases, and as Connelly showed, proceeds held by the company can affect the estate tax value of the shares. This is educational information rather than tax advice, so confirm your own situation with a CPA.

Business Succession Planning With Life Insurance

The Short Version

What it does. Business succession planning with life insurance puts cash in the right hands on the day an owner dies or steps away, so the company does not have to liquidate equipment, drain its credit line, or find a buyer in a hurry.
The usual structures. A cross purchase, where the owners each hold coverage on one another. An entity redemption, where the company owns the policies. Or a hybrid that decides which one applies later.
What changed in 2024. The Supreme Court held that death benefit a corporation collects to redeem a deceased owner's shares counts as a company asset when the estate values those shares.
It covers more than a buyout. The same money can pay estate taxes, keep a lender calm, and even out inheritances between the child who runs the business and the ones who do not.
Order matters. Write the agreement first, then fund it. Coverage that does not match the paperwork causes the fight it was meant to prevent.

Business succession planning with life insurance answers a plain question: on the day an owner dies, retires, or walks out, where does the money come from? A succession plan on paper is a promise about who ends up owning the company. Coverage is what funds that promise on the exact day it comes due, which is almost never a day the business has spare cash sitting around. For most closely held companies, that timing problem is the whole problem.

What Business Succession Planning With Life Insurance Solves

For most owners, the business is the largest thing they own and the hardest thing to turn into money. A house has comparables. A retirement account has a balance. A privately held company has a value somebody has to argue for, and no buyer standing by.

So when an owner dies, two people end up unhappy at the same time. The heirs inherit a share they cannot spend and cannot control. The surviving partners inherit a co-owner they never chose, usually a spouse who has no interest in running a machine shop or a dental practice. Both sides want the same thing, which is for one to buy out the other. Neither has the cash.

Life insurance is the one asset that shows up funded on the day of the event. That is the entire mechanism. A death benefit arrives, generally free of income tax, and the agreement tells everyone where it goes.

Surveys of small business owners keep finding the same thing. Most have no written succession plan at all, and a large share of the ones who do have never funded it. A signed agreement with nothing behind it is a lawsuit waiting for a trigger.

The Three Ways A Business Changes Hands

Every succession plan lands in one of three places. The structure of the coverage follows from which one you are aiming at.

Inside The Family

One child is in the business and two are not. The company may be seventy percent of the estate. If it passes in equal shares, the child running it now answers to siblings who want distributions instead of reinvestment. A permanent policy on the parent can fund the non operating children so the operator inherits the company clean.

To Partners Or Key Employees

This is the classic buy-sell arrangement. Coverage is written on each owner in an amount tied to that owner's share, and the agreement obligates the survivors or the company to buy at a defined price. If a key employee is the intended successor, the same idea applies with a longer runway and often an installment structure. Our post on buy-sell agreement funding walks through the mechanics in detail.

To An Outside Buyer

Even a planned outside transaction can fall apart if the owner dies mid process, or if the person the buyer was counting on disappears. Coverage here does two jobs. It protects enterprise value while the deal is pending, and it replaces the earnings a lost key person was generating so the price does not get renegotiated downward.

What The Connelly Decision Changed For Owners

In June 2024 the Supreme Court decided a case that quietly rewrote a lot of buyout paperwork. Two brothers owned a building supply company. The corporation held policies on both of them so it could redeem the shares of whichever brother died first. When one did, the estate valued his shares without counting the insurance money, on the theory that the money was spoken for.

The Court disagreed, unanimously. The death benefit was a corporate asset on the date of death, and the company's obligation to redeem the shares did not offset it. The shares were worth more than the estate had reported, and the estate owed more tax as a result. You can read the reasoning in the Court's 2024 opinion.

Practical consequences worth raising with your attorney and CPA:

Entity redemption agreements written before 2024 may now produce a bigger estate tax bill than anyone modeled.
A cross purchase structure, or an insurance limited liability company holding the policies, keeps the death benefit off the company's balance sheet. Both add administrative work.
Valuation formulas buried in old agreements deserve a fresh read. Several of them assume the insurance proceeds wash out.

None of this makes entity redemption wrong. It means the choice between structures is now a tax decision as much as a convenience decision, and it should be made with a lawyer rather than copied from a template.

Sizing And Structuring The Coverage

The order of operations matters more than the product. Coverage that does not match the agreement is worse than no coverage, because it creates a windfall for one party and a claim from another.

Get a defensible value. An independent valuation, or at minimum a formula in the agreement that a court could apply. A number written on a napkin in 2011 is not a plan.
Write the agreement. Who is obligated to buy, at what price, on which triggers, and on what timeline.
Match ownership and beneficiary to the structure. Cross purchase means each owner owns and is beneficiary of coverage on the others. Redemption means the company owns and collects. Getting this backwards is common and expensive.
Choose the term. Term coverage fits a defined runway, such as a ten year installment buyout or a loan guarantee. Permanent coverage fits a need that never expires, including estate tax liquidity and a lifetime transfer.
Review every few years. Values move, owners come and go, and old policies get orphaned.

Permanent coverage earns a second look here for a reason that has nothing to do with death. A properly designed whole life policy builds cash value the business or the owner can borrow against while living, which can fund a partial buyout of a retiring partner, cover a gap during a transition year, or serve as the collateral a bank asks for. That is the AND asset at work, and it is a common piece of the plans we build for business owners and high earners.

Where To Start

You do not need the whole plan finished to make progress. Start with what the company is worth, who is meant to end up owning it, and whether anything today would actually produce the cash to make that happen. Most owners find the gap in about twenty minutes.

From there it is a coordinated job. Your attorney drafts, your CPA models the tax, and we handle the funding and the underwriting so the coverage matches what the documents say. If you want to walk through your own situation, you can schedule a conversation and we will start with the numbers you already have.

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This article is for educational purposes only and is not financial, tax, or legal advice. Product features, guarantees, and tax treatment vary by policy and carrier and are subject to the terms of the issuing company. Guarantees are based on the claims-paying ability of the issuer. Please consult a licensed professional about your specific situation.