STOCK REDEMPTION LIFE INSURANCE PLANNING
Kelly Insurance Group provides stock redemption life insurance planning for business owners — explaining how entity-purchase buy-sell agreements work, how they compare to cross-purchase structures, how policies must be sized to current business valuations, and why the legal agreement and the life insurance funding must be reviewed together.
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STOCK REDEMPTION (ENTITY-PURCHASE) STRUCTURE
In a stock redemption buy-sell agreement, the business entity — not the individual owners — owns and is the beneficiary of life insurance policies on each owner. When an owner dies, the company receives the death benefit and uses it to purchase the deceased owner's shares from their estate. The remaining owners' percentage ownership increases proportionally without them personally funding the buyout.
- Simpler administration — one entity owns all policies
- No individual premium obligations for each owner
- Automatic ownership increase for surviving owners
- Death benefit received by C-corp may create alternative minimum tax issues
- Surviving owners do not receive a step-up in cost basis on acquired shares
- Corporate ownership creates potential transfer-for-value concerns
WHAT EVERY BUSINESS OWNER WITH A BUY-SELL AGREEMENT NEEDS TO KNOW.
POLICY SIZING MUST TRACK BUSINESS VALUATION
A buy-sell funding policy must be sized to the agreed valuation of the business interest being transferred. If the business grows significantly after the policy is placed and the valuation is not updated, the death benefit may be insufficient to fully fund the buyout. Regular review — aligned with business valuation updates — is essential to maintaining adequate funding.
THE BUY-SELL AGREEMENT AND THE LIFE INSURANCE MUST ALIGN
The legal buy-sell agreement and the life insurance funding must be reviewed together. A cross-purchase agreement funded with entity-owned policies creates a misalignment that can affect both the tax outcome and the legal enforceability of the agreement. The business attorney, CPA, and life insurance advisor need to coordinate on both the agreement structure and the funding structure.
PREMIUMS ARE NOT DEDUCTIBLE — IN MOST STRUCTURES
Life insurance premiums paid to fund a buy-sell agreement are generally not deductible as a business expense when the company is the beneficiary. This is a standard characteristic of business-owned life insurance used for owner benefit purposes and should be reflected in the company's financial planning and cash flow projections.
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Kelly Insurance Group is a specialty insurance brokerage headquartered in Pittsburgh, with offices in Los Angeles and Detroit, serving clients nationwide. As an independent broker, we are not tied to any single carrier — we access the full market to find the right product for each client's specific situation, health profile, and financial objectives. Our life insurance practice serves individuals, families, business owners, and public-facing clients across every coverage category.
RELATED BUSINESS LIFE INSURANCE TOPICS
FREQUENTLY ASKED QUESTIONS.
What is a stock redemption buy-sell agreement?
A stock redemption agreement — also called an entity-purchase agreement — is a legal contract in which the business agrees to purchase a deceased owner's shares from their estate when the owner dies. Life insurance owned by the entity on each owner's life provides the funding. The business receives the death benefit and uses it to buy out the deceased owner's interest.
How is a stock redemption different from a cross-purchase agreement?
In a stock redemption, the business entity owns the insurance and buys the shares. In a cross-purchase, individual owners own insurance on each other and buy shares personally. The two structures differ in tax treatment — particularly in the cost basis received by surviving owners on acquired shares — and in administrative complexity when there are multiple owners.
Does stock redemption life insurance create any tax problems for a C-corporation?
Yes. Death benefit proceeds received by a C-corporation may be subject to the corporate alternative minimum tax (AMT) in some circumstances. This is a specific consideration that favors cross-purchase structures for C-corporations in certain situations. The CPA should evaluate the AMT exposure before the buy-sell structure is finalized.
What happens if the business grows significantly after the policy is placed?
If the business valuation increases but the death benefit is not updated, the death benefit may be insufficient to purchase the full ownership interest at fair market value. This leaves the estate underpaid and may create legal complications in executing the buy-sell agreement. Regular valuation reviews — and corresponding policy reviews — are essential.
Can stock redemption life insurance premiums be deducted as a business expense?
Generally, no. Life insurance premiums paid by a business where the business is the beneficiary are not deductible as ordinary business expenses. This is a standard characteristic of entity-owned life insurance used for owner benefit purposes. The CPA should confirm the treatment for the specific business entity type and situation.
What should happen to the stock redemption policy if a partner leaves the business?
If a partner exits without dying, the company-owned policy no longer serves its original purpose. Options include surrendering the policy for cash value, continuing the policy as corporate-owned insurance for other business purposes, or transferring the policy to the departing partner as part of the exit settlement. The appropriate disposition depends on the policy's cash value, the exit terms, and the business's financial situation.
READY TO DISCUSS YOUR LIFE INSURANCE SITUATION?
REVIEW YOUR BUY-SELL AGREEMENT FUNDING WITH A LIFE INSURANCE SPECIALIST.
Kelly Insurance Group helps business owners structure stock redemption life insurance correctly — aligned with the legal buy-sell agreement, sized to current business valuation, and coordinated with the CPA and business attorney.
The availability of coverage and eligibility for coverage can depend on numerous factors. We cannot guarantee that all customers, individuals, and businesses looking for coverage will be successful in these efforts when contacting our team. All policy coverages and terms need to be fully reviewed by the respective consumer to ensure the coverage asked for is what is specifically being quoted or provided by any insurance policy. Insurance Policies, Coverage Changes, and their terms and conditions are not bound or altered until written confirmation is provided by one of our licensed team members or underwriters. This page does not offer legal advice, legal opinions, or policy interpretations. Rather, this page is meant as a resource to help provide customers and insurance consumers with additional considerations that may help in their insurance buying or pursuit of insurance information. Kelly Insurance Group does not employ or direct attorneys.
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Disclaimer: Coverage availability and eligibility may depend on many factors, including underwriting review, carrier guidelines, policy terms, state requirements, business operations, risk characteristics, and other information provided during the application or quoting process. Kelly Insurance Group cannot guarantee that every individual, customer, organization, or business seeking coverage will qualify for, receive, or successfully place insurance coverage. All policy coverages, exclusions, conditions, limits, endorsements, and terms should be carefully reviewed by the consumer, insured, or applicant to confirm that the coverage requested is the coverage being quoted, offered, or provided. Insurance coverage, policy changes, endorsements, cancellations, and other policy terms are not bound, changed, confirmed, or altered unless and until written confirmation is provided by a licensed Kelly Insurance Group team member, the applicable insurance carrier, or an authorized underwriter. This page is provided for general informational purposes only and does not provide legal advice, legal opinions, insurance coverage opinions, or policy interpretations. Information on this page should not be relied upon as a substitute for reviewing the actual policy language or consulting appropriate professional advisors. Kelly Insurance Group does not employ, supervise, or direct attorneys.