Life Insurance

Buy-Sell Agreement

A buy-sell agreement is a legally binding contract that dictates how a business owner's interest will be transferred upon death, disability, or departure—often funded by life insurance so that surviving owners or the business entity have immediate cash to buy out the deceased owner's heirs.

Last reviewed: May 2026 · Editorial methodology

Definition

A buy-sell agreement—also known as a business continuation agreement or buyout agreement—is a contract executed among business co-owners that pre-establishes the sale price and buyer for each owner's interest upon a triggering event such as death, disability, divorce, or voluntary departure. Life insurance is the most common funding mechanism because it provides an immediate, predictable cash payment at the time it is most needed—when an owner dies suddenly. There are two primary structures: a cross-purchase arrangement, where each co-owner buys policies on the other owners and purchases the deceased's interest personally; and an entity purchase (stock redemption) arrangement, where the business entity owns the policies and redeems the deceased owner's shares directly. For a three-owner business valued at $3 million with equal 33% stakes, each owner's interest is worth approximately $1 million, requiring coordinated life insurance coverage to fund the buyout. Buy-sell agreements should be reviewed every three to five years to ensure coverage amounts keep pace with business valuation growth. Without a funded buy-sell agreement, surviving owners may be forced into an unwanted business partnership with the deceased owner's spouse or heirs.

Where this term matters

Life Insurance →Insurance Companies →

Tip

Glossary definitions are educational. Always check your own policy language — insurers can define common terms differently from one another. When in doubt, request a written explanation from your agent.

Related terms

Key Person InsuranceKey person insurance—also called key man insurance—is a life insurance policy owned by a business entity on the life of an individual whose death would cause significant financial loss to the company, with the business named as beneficiary to offset recruitment costs, lost revenue, or loan repayment obligations.Split-Dollar Life InsuranceSplit-dollar life insurance is an arrangement in which two parties—typically an employer and employee—agree to split the premium payments, cash value, and death benefit of a life insurance policy according to a written agreement, often used as an executive benefit.Whole Life InsurancePermanent life insurance with lifelong coverage, fixed premiums, and a cash value component.Term Life InsuranceLife insurance with a fixed term (10/20/30 years) — pure death benefit, no cash value, lowest cost.Irrevocable BeneficiaryAn irrevocable beneficiary designation gives the named beneficiary a vested interest in the life insurance policy, meaning the policyholder cannot change the beneficiary, take a policy loan, surrender the policy, or make other material changes without the irrevocable beneficiary's written agreement.

Related guides

Source: Cover Forge USA editorial team|Last verified: May 2026|Methodology
Definitions are educational and may be simplified. Always refer to your policy contract and consult a licensed agent for terms that affect coverage decisions.
CF

Cover Forge USA Editorial Team

Editorial Lead

This article was researched and written by the Cover Forge USA editorial team against federal sources (NAIC, CMS, FEMA, DOL, SSA, state DOIs) and standard policy forms. Bylines organize content by topic — they do not assert individual licensure. See our editorial-policy for details.

Reviewed June 2026

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