Life insurance for business owners

For owners of closely held businesses: how life insurance protects the company, funds a buyout and settles an estate, and which rules decide how each policy is set up. Read it alongside your attorney and CPA.

Updated October 17, 2026

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The short answer

Life insurance can serve four jobs in a closely held business: protecting the company if a key person dies, funding a buy-sell agreement, giving the owner’s family income and estate cash, and supporting executive retention. Ownership, beneficiary and tax treatment differ by job. For buy-sells, ownership matters most: since Connelly v. United States (2024), company-owned funding can raise a deceased owner’s estate value.

Four jobs life insurance can serve

Four jobs life insurance can serve in a closely held business: typical ownership, what the money does, and where to read more
Job	Typical ownership	What the money does	Read more
Key person protection	Usually the business, which is also the beneficiary.	Replaces lost profit, pays to recruit a successor, and meets a lender’s requirement where a loan calls for one.	Key person insurance
Buy-sell funding	Either the owners insure each other (cross-purchase) or the company insures each owner (redemption), as the agreement provides.	Pays a deceased owner’s estate for the shares.	Buy-sell funding
Family income and estate cash	The owner, or an irrevocable trust set up to hold the policy.	Replaces the owner’s income and gives the estate cash, so heirs are not forced to sell the business.	High-net-worth planning; Trust and estate planning
Executive retention	The executive under a bonus plan, or the company under a deferred-compensation plan.	Rewards and retains the people the business depends on.	The tax rules below

These are common arrangements, not rules: one policy can sometimes serve more than one job, and the right set-up depends on your agreements, entity and advisers.

For your own coverage amount, start with the coverage need calculator. For a personal cash-value design, see max-funded IUL and the tax-free retirement calculator.

Who should own the policy, compared

Key person, cross-purchase, entity redemption and trust-owned coverage compared by owner, beneficiary, purpose, tax treatment, estate effect and main caveat
Question	Key person	Cross-purchase buy-sell	Entity redemption	Trust-owned (ILIT)
Who owns the policy	The business	Each owner, on the other owners	The company	An irrevocable life insurance trust (ILIT)
Who receives the death benefit	The business	The surviving owners	The company	The trust, for the family
What the money is for	Replacing lost profit, reassuring lenders, funding a search	Buying the deceased owner’s shares	Redeeming the deceased owner’s shares	Estate settlement costs and equalizing heirs
Premiums deductible?	No (IRC §264)	No	No	No; gifts to the trust for premiums can qualify for the $19,000 annual exclusion
Death benefit income-taxable?	Tax-free above premiums only if the §101(j) conditions in the tax rules below are met	Generally income-tax-free (IRC §101(a))	The same §101(j) conditions apply when the insured is an employee	Generally income-tax-free (IRC §101(a))
Effect on the estate	Proceeds kept by the company add to its value	Proceeds go to the buyers, not the company; each buyer’s basis in the shares bought is the price paid	Connelly (2024): for a corporation, the proceeds add to its value for estate tax, and the redemption obligation does not offset them	Outside the taxable estate if the trust buys the policy; a policy you give the trust is pulled back in if you die within three years (IRC §2035)
Main caveat	Notice and consent must be signed before the policy is issued	Each owner pays premiums on the others, the number of policies grows quickly with more owners, and moving an existing policy can be a transfer for value	Simplest to administer; most exposed after Connelly	Irrevocable: sizing and drafting come before signatures

Figures are for 2026. Your attorney and CPA decide the structure.Sources: IRC §264; IRC §101; IRC §1012; Connelly v. United States (2024); IRC §2035; IRS 2026 adjustments

The tax rules that decide the design

Premiums

Premiums are not deductible when the business is directly or indirectly a beneficiary of the policy.

Source: IRC §264

Company-owned policies on employees

If a business owns a policy on an employee, including an owner who works in the business, and is a beneficiary, the death benefit is income-tax-free only up to the premiums paid unless two conditions are met. First, before the policy was issued, the employee was told in writing that the business intended to insure their life, the maximum face amount, and that the business would be a beneficiary, and consented in writing to the coverage, including that it may continue after they leave. Second, one of the statute’s exceptions applies: the insured was an employee at some point in the 12 months before death, or was a director or highly compensated employee when the policy was issued; or, to the extent the proceeds are paid to the insured’s family members, to an individual other than the business named as the insured’s beneficiary, to a trust for any of them or to the insured’s estate, or are used to buy an ownership interest in the business from any of those people. The business also reports these policies each year on Form 8925.

Sources: IRC §101; IRS Form 8925

Moving an existing policy

Selling or assigning a policy can make part of the death benefit taxable under the transfer-for-value rule. The statute exempts transfers to the insured, a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer, but not a reportable policy sale: a purchase by someone with no substantial family, business or financial relationship with the insured apart from the policy. A transfer to a fellow shareholder is not on that list, so have your CPA check any change of ownership first.

Source: IRC §101

Executive bonus plans

When the company pays an employee’s premium as extra pay, the employee owns the policy and is taxed on the bonus, and the company can deduct it as compensation if the employee’s total pay is reasonable.

Source: IRC §162

Policies given to a trust

If you give a policy you own to an irrevocable trust and die within three years, the proceeds are included in your estate. A trust that buys the policy from the start avoids that look-back.

Sources: IRC §2035; IRC §2042

Federal estate and gift figures for 2026

For deaths in 2026 the federal basic exclusion amount is $15,000,000 per person, and the annual gift exclusion is $19,000.

Source: IRS 2026 adjustments

What Connelly changed, in the case’s own numbers

Two brothers owned Crown C Supply. Their agreement required the company to buy a deceased brother’s shares, and the company bought life insurance to fund it. After Michael died, his estate reported his shares at $3 million. A unanimous Supreme Court agreed with the IRS that the company’s obligation to redeem the shares did not offset the insurance proceeds when the shares were valued for estate tax.

Connelly v. United States: figures reported in the opinion and figures calculated on this page from them
Figure	Amount	Where it comes from
Company value without the insurance proceeds	$3.86 million	Reported in the opinion (the estate’s valuation)
Insurance proceeds used to redeem the shares	$3.00 million	Reported in the opinion
Company value counting the proceeds	$6.86 million	Calculated here: 3.86 + 3; the Court uses the same figure
Michael’s 77.18% stake, proceeds left out	$2.98 million	Calculated here: 3.86 × 0.7718, rounded; the opinion says about $3 million
Michael’s 77.18% stake, proceeds counted	$5.29 million	Calculated here: 6.86 × 0.7718, rounded; the opinion says up to $5.3 million
Additional estate tax the IRS determined	$889,914	Reported in the opinion; not calculated on this page

Calculated rows multiply the opinion’s figures (in $ millions) and are rounded to the nearest $10,000.

The Court said a cross-purchase agreement, in which the owners buy policies on each other, would have avoided the insurance raising the value of the shares, but that it has drawbacks: each owner must keep paying premiums on the others, and it has its own tax consequences. The Court did not hold that a redemption obligation can never reduce a company’s value. The case concerned a corporation; ask your attorney how it applies to your entity and agreement.

More on structuring the agreement: buy-sell funding.Source: Connelly v. United States (2024)

Who this page is for

Useful if

You own a closely held business with partners, lenders or key people whose death would hurt revenue.
You have a buy-sell agreement and are not sure how it is funded.
Most of your estate is the business.

Not covered here

Drafting agreements or trusts.
Tax advice for your situation.
Group life benefits for employees.

Coordinating with your attorney and CPA

Who usually handles each part of a business insurance plan
Part of the plan	Usually handled by
Drafting or amending the buy-sell agreement and any trust	Your attorney
The business valuation and how the agreement sets the price	Your CPA or an independent appraiser, as the agreement provides
Tax treatment, Form 8925 and compensation plans	Your CPA
Sizing coverage, policy ownership with your advisers, applications, and the notice-and-consent forms before issue	CentraLife, with your attorney and CPA
Checking coverage against the current valuation	All three, on a set schedule

Questions to settle before you buy or restructure

What is the business worth today, and how does the agreement set the price?
Who must buy a deceased owner’s shares: the other owners or the company?
For each policy, who owns it, who pays the premium and who is the beneficiary?
For each company-owned policy on an employee, were notice and consent signed before issue, and which §101(j) exception applies?
Is Form 8925 filed each year for those policies?
Before a policy moves between the company and the owners, has your CPA checked the transfer-for-value rule?
What does the agreement do on disability, retirement or departure, which life insurance alone does not fund?
In a cross-purchase, what happens if one owner stops paying premiums on another?
How does the agreement treat insurance proceeds when it values the shares?
When will you next check coverage against the valuation?

Business coverage: common questions

What kinds of business life insurance does CentraLife design?

Four families of work: key person coverage (company-owned protection on the people revenue depends on), buy-sell funding (cross-purchase and post-Connelly redemption designs), executive benefits (§162 bonus plans and informally-funded deferred compensation as golden handcuffs), and owner personal planning — the max-funded cash-value designs that build the owner’s own retirement outside the business. Most engagements touch more than one.

Do you meet with Michigan business owners in person?

Yes. CentraLife is headquartered at 290 Town Center Dr in Dearborn, and advisors meet business owners across metro Detroit and the state in person — or by phone and video for the rest of the country. We’re licensed in 49 states, and you can verify our Michigan licensing through the state regulator, DIFS, at michigan.gov/difs.

Are business life insurance premiums tax-deductible?

Generally no — IRC §264 blocks deductions for premiums when the business is a beneficiary, and anyone promising “deductible life insurance” deserves a second opinion. What decides the tax result is ownership and paperwork: the part of a company-owned death benefit above the premiums paid is income-tax-free only when the §101(j) conditions are met, and in a §162 bonus plan the premium is paid as compensation — deductible to the company if the employee’s total pay is reasonable, and taxable to the employee. Structure determines the answer, which is why we design with your CPA.

We already have coverage a bank required years ago. Is that enough?

A lender minimum answers the lender’s question — will the loan get repaid — not yours: will the company survive, will the buyout get funded, will the family get bought out at real value. Coverage placed to close a loan is also where we most often find §101(j) paperwork gaps and valuations three cycles stale. The in-force review is free and specific: what you have, what it actually does, what’s missing.

How much life insurance does a business owner need?

Size it from obligations, not from a multiple. Add up the four exposures separately: the revenue and lender covenants exposed to one key person, the buy-sell obligation at the CURRENT valuation, any personal debt or income the household depends on, and the cash an estate would need at settlement. Lenders may set their own floor, but the buy-sell number should track today’s valuation, not the one in the 2019 agreement. For deaths in 2026 the federal basic exclusion amount is $15,000,000 per person, so for most owners the binding problem is illiquidity, not federal estate tax.

What happens to a business when one partner dies and the buy-sell is unfunded?

The surviving owners still owe the estate the agreement price — from company cash flow, a loan taken when the bank is most nervous, or an installment note that keeps the family on the cap table. Funded properly, life insurance delivers the money income-tax-free at the exact trigger. The ownership choice matters: after Connelly v. United States (2024), proceeds a corporation receives to redeem a deceased owner’s shares increase its value for estate tax, while in a cross-purchase the proceeds go to the buyers and each buyer’s basis in the purchased shares is the price paid. Have your attorney re-read any redemption-style agreement written before 2024.

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

No, and owning one does not solve the other. Key person coverage replaces what the business loses when the person revenue depends on dies — the company owns it, the company is paid, and whether the benefit above the premiums paid is tax-free depends on the §101(j) conditions explained above. Buy-sell funding pays for equity: it puts cash in the hands of whoever is obligated to purchase the deceased owner’s shares. Many closely held companies need both, plus the owner’s own personal coverage, which is a third policy with a third owner.

Sources

Updated October 17, 2026. Sources accessed October 17, 2026. Educational information, not legal or tax advice. Tax law and IRS figures change; confirm the structure with your own attorney and CPA.

Bring the buy-sell. We’ll bring the math.

A licensed advisor reviews what you have — agreements, in-force policies, the lender requirements — and shows you what’s funded, what isn’t, and what it costs to fix. No cost, no obligation.

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