When an owner dies, who buys their share — and where does the cash come from?
In an own-your-own-policy buy-sell, each owner insures their own life and endorses the death benefit to the co-owners to fund the buy-out. You get one policy per owner, the proceeds stay outside the company, and each owner keeps a portable policy they control. Here’s exactly how it works:
What is an own-your-own-policy buy-sell agreement?
An own-your-own-policy buy-sell agreement is a contract among the owners of a closely held business. It sets, in advance, what happens to an owner’s interest when a triggering event occurs: most commonly death, but also disability, retirement, or a voluntary departure.
What makes it distinctive is who owns the insurance. Each owner buys, owns, and controls a policy on their own life — not on the other owners. Through a non-equity endorsement split-dollar arrangement, each owner endorses the policy’s death benefit to the co-owners. When an owner dies, that endorsed benefit funds the surviving owners’ purchase of the interest directly from the estate.
The result blends the best of the other two structures: only one policy per owner (like an entity purchase), with the proceeds owned by individuals and kept outside the company (like a cross-purchase). Buyers still receive a step-up in basis, and — because each owner insures their own life — the arrangement avoids the transfer-for-value trap that complicates a classic cross-purchase.
And because each owner holds their own policy, it’s portable: an owner who retires or leaves can keep the coverage and even use its cash value for personal or retirement needs.
Each owner insures their own life and promises that benefit to the co-owners. When someone dies, that money buys out their share — directly, from the family. One policy each, proceeds outside the company, fully portable, with fewer of the tax traps of a cross-purchase.
Why owners choose own-your-own
One policy per owner. The policy count stays low even as you add owners — no cross-purchase tangle.
Portable. Each owner controls their own policy and can keep it if they retire or leave.
Proceeds bypass the company. Insurance stays out of the business — and out of its estate-tax value.
Step-up in basis. Buyers’ cost basis rises to today’s value, cutting future capital-gains tax.
Avoids transfer-for-value. Owning a policy on your own life sidesteps a key cross-purchase trap.
Coverage keeps the doors open — and the family taken care of — no matter which owner is gone.
How the funding flows
A life-insurance-funded own-your-own-policy plan runs on a simple, repeatable sequence — set up once, and it executes automatically when it’s needed most.
Value the business
Owners agree on a valuation method (or a blend) and write it into the agreement, so the buy-out price is settled long before anyone needs it.
Each owner insures their own life
Every owner applies for, owns, and pays premiums on a single policy on their own life, sized to their share of the business value.
Endorse the benefit
Through an endorsement split-dollar agreement, each owner endorses their death benefit to the co-owners, who account for the modest economic-benefit cost.
Survivors buy with the benefit
When an owner dies, the endorsed benefit funds the surviving owners’ purchase of the interest from the estate — with a stepped-up basis on what they buy.
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Own-your-own-policy: the pros and the cons
After 25-plus years structuring these plans, here’s the candid trade-off. The own-your-own approach captures most of the cross-purchase tax benefits with just one policy per owner — but it leans on split-dollar mechanics that demand careful drafting.
Advantages
- +
One policy per owner. No matter how many owners, the policy count stays low — solving the cross-purchase proliferation problem.
- +
Proceeds bypass the company. The insurance is individually owned, so it never inflates the business’s estate-tax value — avoiding the Connelly result.
- +
Portable & owner-controlled. An owner who retires or leaves keeps their own policy — and can use its cash value for personal or retirement needs.
- +
Step-up in basis for buyers. Surviving owners take a cost basis equal to what they pay, reducing capital-gains tax on a future sale.
- +
Avoids transfer-for-value. Because each owner insures their own life, the trap that haunts a cross-purchase is sidestepped.
- +
No corporate AMT. No C corporation receives the proceeds, so the corporate alternative minimum tax isn’t a concern.
Drawbacks & risks
- −
More complex to draft. The endorsement split-dollar agreement and benefit endorsements add documentation a simple plan doesn’t need.
- −
Imputed economic benefit. Each owner generally accounts for the value of the death-benefit protection endorsed to the co-owners as an annual economic benefit.
- −
Coordination required. The split-dollar agreement, the buy-sell, and the policy endorsements must stay aligned as owners and values change.
- −
Doesn’t fit every situation. Entity type, owner count, and owner relationships all affect whether the structure is the right tool.
- −
Less familiar. Newer and less common than the other structures, so it calls for an advisor experienced with split-dollar.
- −
Unwind on exit. When an owner leaves, the endorsement must be released and the arrangement updated for the remaining owners.
Entity purchase vs. cross-purchase vs. own-your-own-policy
There is no single “best” buy-sell structure — only the right fit for your number of owners, your entity type, and your estate-tax exposure. Here’s how the three life-insurance-funded approaches compare on the factors that actually move the needle.
| Factor | Entity Purchase Stock redemption — business owns the policies | Cross-Purchase Each owner insures the other owners | Own-Your-Own Policy Each owner insures their own life, endorsed to others |
|---|---|---|---|
| Who owns the policy | The business entity | Each owner, on every other owner | Each owner, on their own life |
| Policies for N owners | N One per owner | N × (N−1) Grows fast | N One per owner |
| Premium fairness | Equalized Company pays all | Uneven Insuring older/less-healthy owners costs more | Fair Each pays for own coverage |
| Estate-tax / Connelly exposure | Higher Proceeds can inflate company value | Lower Proceeds bypass the company | Lower Proceeds stay outside the entity |
| Basis step-up for survivors | No Basis unchanged | Yes Full step-up on purchased shares | Yes Cross-purchase mechanics |
| Creditor protection | Weaker Reachable by business creditors | Stronger Held individually | Stronger Owner controls the policy |
| Portability if owner leaves | Low Business owns it | Limited Others own it | High Owner keeps their own policy |
| Administrative complexity | Lowest | Medium | High Split-dollar paperwork |
| Best fit | 3+ owners wanting simplicity, modest estates | 2–3 owners focused on tax efficiency | Owners wanting one policy each and tax efficiency |
A growing post-Connelly alternative is the special-purpose insurance LLC: a separate LLC owns one policy per owner and distributes proceeds so surviving owners buy the shares — delivering cross-purchase tax results (step-up, proceeds outside the operating company) without policy proliferation. It adds a separate partnership tax return and its own drafting considerations.
Entity Purchase
- + Only one policy per owner
- + Simple, centralized administration
- + Equal premium cost across owners
- − can raise estate taxConnelly
- − No basis step-up for survivors
- − Creditor & C-corp AMT exposure
Cross-Purchase
- + Proceeds bypass the company
- + Full basis step-up for buyers
- + Income-tax-free benefit to owners
- − Policy count explodes with owners
- − Uneven premiums by age/health
- − Transfer-for-value risk on changes
Own-Your-Own Policy
- + One policy per owner, kept by the owner
- + Portable if they retire or leave
- + Proceeds stay outside the entity
- − More complex to draft
- − Imputed economic-benefit cost
- − Doesn’t fit every entity type
Why own-your-own sidesteps the Connelly problem
In a unanimous opinion by Justice Thomas, the Court ruled that company-owned life insurance increases a business’s value for estate tax. That ruling targets entity-purchase (redemption) plans. An own-your-own-policy structure keeps the insurance in the owners’ hands — outside the company entirely — which is exactly why it’s drawn fresh attention since the decision. Here’s the case, and why structure matters.
The facts
Brothers Michael and Thomas Connelly were the sole shareholders of Crown C Supply, a closely held building-supply corporation. Their agreement gave the surviving brother the option to buy the deceased’s shares; if he declined, the corporation was required to redeem them.1
To fund that obligation, Crown bought $3.5 million of life insurance on each brother. When Michael died, Thomas declined to buy, so Crown was obligated to redeem. The family agreed Michael’s shares were worth $3 million, and Crown paid the estate that amount.1, 2
The dispute
On audit, everyone agreed the life-insurance proceeds were a corporate asset. The narrow fight was this: does the company’s obligation to redeem the deceased’s shares act as a liability that offsets those proceeds when valuing the company for estate tax?1
The estate valued Crown without the insurance (relying on the older Blount line of cases). The IRS insisted the proceeds counted in full. The District Court and the Eighth Circuit sided with the IRS; the Supreme Court agreed to settle a circuit split.2, 3
A corporation’s obligation to redeem a deceased shareholder’s stock is not a liability that reduces the corporation’s value for federal estate tax. Life-insurance proceeds payable to the company are an asset that increases its fair market value — and the redemption obligation does not offset them. A hypothetical buyer, the Court reasoned, would not treat a dollar-for-dollar share buy-back as making the company worth less.1
Case figures drawn from the slip opinion and case syllabus (sources 1–2)
💡 What it means for own-your-own plans
Own-your-own avoids the inflation. Because each owner — not the company — holds the policy, the proceeds never raise the business’s value for estate tax. That’s a core reason the structure has gained attention after Connelly
The ruling hits entity-owned insurance at corporations, partnerships, and LLCs that use company-owned policies to fund a redemption — not personally owned coverage endorsed between owners.4, 5
Still get a date-of-death appraisal. Whatever the structure, a proper valuation matters and IRS scrutiny of buy-sell agreements is rising.5
Insuring your own life avoids transfer-for-value. Unlike a classic cross-purchase, own-your-own dodges the transfer-for-value trap — but its split-dollar mechanics still need careful drafting.4
The exemption is now $15M per person (2026), made permanent. Many estates won’t owe federal tax — but inclusion still matters near the threshold, for state estate taxes with far lower limits, and for basis planning.6
Review existing redemption plans. If your current agreement is entity-owned, Connelly is the prompt to revisit whether own-your-own, a cross-purchase, or an insurance-LLC approach fits better. Coordinate with your attorney and CPA.1
📚 Sources for this section
Connelly v. United States, 602 U.S. ___, No. 23–146 (June 6, 2024) (slip opinion, Thomas, J.). supremecourt.gov
Connelly v. United States, 602 U.S. ___ (2024) — case summary, syllabus & valuation figures. Justia U.S. Supreme Court Center. supreme.justia.com
Connelly v. Internal Revenue Service — procedural history, §2703(b) and the Blount circuit split. Cornell Legal Information Institute. law.cornell.edu
Business Buy-Sell Agreements In The Wake of Connelly v. IRS — reach across entity types; cross-purchase, own-your-own & insurance-LLC alternatives. Kitces.com. kitces.com
It’s Time to Revisit Buy-Sell Agreements After the Supreme Court’s Connelly Decision — appraisal need & rising IRS scrutiny. Harris Beach Murtha. harrisbeachmurtha.com
2026 Outlook: The One Big Beautiful Bill Act & Permanent Estate Tax Exemptions — $15M per-person exemption effective 2026. Harter Secrest & Emery LLP. hselaw.com
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Funding your buy-sell with life insurance
A signed agreement is only a promise until it’s funded. Life insurance is the cornerstone — it turns a small annual premium into the exact lump sum the business needs the day an owner dies.
When an owner dies, the agreement obligates a purchase — but the cash has to come from somewhere. Few businesses keep six or seven figures idle for that day, and borrowing or selling assets in a crisis is exactly what a buy-sell exists to prevent. Life insurance solves the timing problem: the death benefit arrives precisely when the buy-out is triggered.
The appeal is leverage. Each owner funds a large, fixed obligation for pennies on the dollar in annual premium — and the death benefit is generally received income-tax-free. In an own-your-own plan, each owner holds a policy on their own life and endorses the benefit to the co-owners, so the proceeds reach the buyers without ever passing through the company.
Funding tip: because every owner needs only one policy — on their own life — the plan stays compact even as you add owners, and each owner keeps a portable, cash-value asset they can carry into retirement.
- ⚡
Immediate liquidity — full benefit paid at death, when the obligation hits.
- 💲
Leverage — a modest premium funds the entire buy-out amount.
- 🧾
Generally income-tax-free proceeds to the individual buyers — and no employer-owned (Form 8925) filing, since the owners hold the policies.
- 🔒
Certainty — the benefit is fixed and guaranteed, subject to the insurer’s claims-paying ability.
- 🎯
Structure-flexible — policy ownership can mirror entity, cross-purchase, or own-your-own designs.
Illustrative only — not a quote. Use the funding calculator below to size the actual benefit your agreement needs.
⏱️ Term life
- + Most coverage per premium dollar
- + Good for time-limited needs (loan payoff, planned exit)
- – Coverage ends when the term does
♻️ Permanent life
- + Pays regardless of when death occurs
- + Cash value can support redemption or retirement
- – Higher premium than term
One limitation to plan around: life insurance funds only the death trigger (with the possibility of adding chronic or critical illness triggers). An owner who is alive but permanently unable to work, or is unable to do their specific job, is just as disruptive — which is where disability buy-out coverage comes in.
Funding your buy-sell with disability insurance
A buy-sell isn’t only about death. An owner can be sidelined by illness or injury — still owning their stake, often still drawing income — and most agreements have no funded plan for it. Disability buy-out insurance fixes that gap.
It’s the trigger owners forget, yet during the working years it’s the more likely one. According to the Social Security Administration, just over 1 in 4 of today’s 20-year-olds will become disabled before they reach retirement age. A permanently disabled co-owner can’t contribute — but may still hold equity and expect to be paid.
Ordinary disability income insurance won’t solve this. It replaces a disabled person’s paycheck; it does not supply the capital to buy them out. For that you need Disability Buy-Out (DBO) insurance — a distinct policy built to fund the purchase of a disabled owner’s interest under the agreement.
After a qualifying disability and an elimination period — commonly 12 to 24 months, long enough to confirm the condition is lasting — the policy pays a lump sum, structured installments, or a blend, giving the business the cash to complete the buy-out cleanly.
- 🪛
Funds the “living” trigger a death-benefit policy can’t touch.
- 💵
Lump-sum or installment payout to complete the purchase.
- ⏳
Long elimination period confirms the disability is permanent before funds release.
- 🏢
Protects the business from indefinitely paying a non-working owner.
- 🔗
Pairs with life insurance so both triggers — death and disability — are funded.
Qualifying disability. An owner becomes totally disabled as defined in the policy and the agreement.
Elimination period. A waiting period (often 12–24 months) confirms the disability is lasting.
Buy-out funded. The policy pays a lump sum and/or installments to purchase the disabled owner’s interest.
👤 Disability income (DI)
- + Keeps personal income flowing
- – Provides no capital to purchase shares
🏢 Disability buy-out (DBO)
- + Funds the actual purchase of the interest
- + Coordinates with the buy-sell’s disability terms
Drafting tip from 25+ years of these plans: define “disability” the same way in the policy and the agreement. Mismatched definitions are the most common reason a disability buy-out fails to pay when everyone expected it to.
Funding with a combination of life & disability insurance
The most complete approach doesn’t choose between the two — it layers them. Life insurance funds the death trigger; disability buy-out insurance funds the living one. Together they leave no exit unfunded.
Death
An owner dies and the estate must be bought out.
Funded by life insurancePermanent disability
An owner is permanently unable to work or to perform their specific role.
Funded by disability buy-outChronic / critical illness
A qualifying serious illness accelerates an owner’s exit.
Funded by living-benefit riders Optional add-on to the life policy- ✓
Gap-free coverage. Every way an owner can exit — death or disability — has a funded source behind it.
- ✓
Coordinated definitions. Drafting both policies alongside the agreement keeps “disability” and valuation consistent.
- ✓
One agreement, fully backed. The same buy-sell governs both triggers, so there’s no scramble to amend later.
- ✓
Often one underwriting process. Life and disability buy-out coverage can frequently be arranged together.
- ✓
Optional living benefits. Chronic or critical-illness riders on the life policy can advance funds before death.
- ✓
Peace of mind. Owners and families know the buy-out is funded no matter which event comes first.
The expert’s default: for most multi-owner businesses, the combined approach is the one I recommend exploring first. Size the life-insurance portion with the calculator below, then have an advisor layer in disability buy-out coverage and any living-benefit riders.
Fund every exit — death and disability.
Tailor your life-insurance need, then talk to an expert about layering in disability coverage.
What if an owner is uninsurable?
Sometimes an owner can’t qualify for life or disability coverage — due to health history, age, or a hazardous occupation. The agreement still needs a plan. The good news, after 25-plus years of these cases: uninsurable rarely means unfundable.
Shop impaired-risk & specialty carriers
Underwriting varies widely by insurer. Specialty and impaired-risk carriers, table-rating and “table-shave” programs, and simplified- or guaranteed-issue products can often place coverage that a standard carrier declined — sometimes at a higher but workable premium.
Insure what you can, backstop the rest
A rated or reduced-amount policy rarely covers the full buy-out — but partial insurance plus a funded backstop (below) closes the gap. Don’t let “not fully insurable” become “not insured at all.”
Build a sinking fund
The business sets aside cash over time into a dedicated reserve earmarked for the buy-out. Flexible and simple — but slow to accumulate and potentially short if a trigger occurs early, so it’s best paired with other methods.
Installment buy-out / promissory note
The agreement can require the purchase to be paid over time from future cash flow, secured by a promissory note with interest. It spreads the cost when insurance isn’t available, and pairs naturally with partial coverage.
Adjust the structure
Sometimes the fix is structural — for example, a cross-purchase that insures only the healthy owners, with the uninsurable owner’s exit funded by a note or reserve. The right structure can route around an insurability problem.
Bank financing (last resort)
If nothing else is in place, the buyer borrows at the time of the buy-out. It’s the least certain option — credit and rates aren’t guaranteed when the day comes — so treat it as a fallback, not a plan.
The one rule that matters most: the worst plan is no plan. A partially funded agreement with a structured payout beats an unfunded promise every time. Put the agreement in place now, fund it to the extent you can, and re-shop coverage as health and finances change — insurability isn’t always permanent.
See exactly how much coverage each owner needs
Stop guessing at the buy-out price. Our funding calculator values your business five recognized ways, then sizes the life insurance needed to fund the buy-out of each owner’s interest — so the agreement is fully funded the day it’s signed.
- ✓ Value your business 5 ways: EBITDA multiple, book value, capitalization of earnings, excess-earnings, and a blended figure
- ✓ Per-owner coverage based on each owner’s percentage
- ✓ Flags any policy set below the calculated need
- ✓ Connects straight to instant-decision quotes
Cross-purchase buy-sell FAQ
Fund your buy-sell the right way
Size the coverage your agreement needs, then get an instant-decision quote — online, with or without an agent.
References
Connelly v. Internal Revenue Service — Supreme Court Bulletin. Cornell Legal Information Institute. law.cornell.edu
Connelly v. United States, 602 U.S. ___ (2024) — case summary and syllabus. Justia. supreme.justia.com
Connelly v. Internal Revenue Service — Supreme Court Bulletin. Cornell Legal Information Institute. law.cornell.edu
Business Buy-Sell Agreements In The Wake of Connelly v. IRS — pros/cons of cross-purchase vs. entity-purchase and the insurance LLC. Kitces.com. kitces.com
Strategies for buy-sell agreements using insurance — insurance LLC mechanics, transfer-for-value. Thompson Coburn LLP. thompsoncoburn.com — endorsement split-dollar structure. Diversified Brokerage Services (DBS).
Own Your Own Policy Buy-Sell — endorsement split-dollar structure. Diversified Brokerage Services (DBS). dbs-lifemark.com
Tax Considerations for Cross-Purchase vs. Entity-Purchase Buy-Sell Agreements. Cummings & Cummings Law. cummings.law
It’s Time to Revisit Buy-Sell Agreements After Connelly. Harris Beach Murtha. harrisbeachmurtha.com
2026 Outlook: The One Big Beautiful Bill Act and Permanent Estate Tax Exemptions. Harter Secrest & Emery LLP. hselaw.com
Important disclosures
This site is for educational purposes, and QB Insurance LLC, nor its agents, provide tax or legal advice. We are trying to provide relevant information for funding a buy-sell agreement with life insurance, long-term care and/or disability insurance.
This page is provided by Quote-Bot for general educational purposes only and reflects information available as of its publication. It is not legal, tax, accounting, or investment advice, and no attorney-client or fiduciary relationship is created by reading it. Buy-sell agreements and their tax treatment are highly fact-specific. Before adopting, amending, or relying on any buy-sell structure, consult your own attorney and CPA.
Estate-tax figures, the Connelly case description, and structure comparisons are summarized from public sources cited above; they are not a substitute for the full opinion or professional counsel. Life insurance product availability, underwriting outcomes, and coverage amounts vary by applicant and state. Guarantees are subject to the claims-paying ability of the issuing insurer.
Sources for the Connelly v. United States summary
Connelly v. United States, 602 U.S. ___, No. 23–146 (June 6, 2024) (slip opinion). supremecourt.gov
Connelly v. United States, 602 U.S. ___ (2024) — syllabus & valuation figures. Justia. supreme.justia.com
Connelly v. Internal Revenue Service — procedural history & §2703(b). Cornell LII. law.cornell.edu
Business Buy-Sell Agreements In The Wake of Connelly v. IRS. Kitces.com. kitces.com
It’s Time to Revisit Buy-Sell Agreements After Connelly. Harris Beach Murtha. harrisbeachmurtha.com
2026 Outlook: The One Big Beautiful Bill Act & Permanent Estate Tax Exemptions. Harter Secrest & Emery LLP. hselaw.com
