Which policy solves which problem, who should own it, and the paperwork that has to happen before it is issued.
Last reviewed October 2026 by Dev Gaymes, Texas-licensed life insurance agent, NPN 16654074 · Editorial policy
A business owner usually needs life insurance for one of four reasons: to keep the business running if a key person dies, to fund a buyout between owners, to satisfy a lender, or to protect their own family. Each one is owned, paid and taxed differently, and buying one does not cover the others. This page explains which is which, the tax rule that catches small businesses most often, and what I need from you to get coverage in place.
Owners often buy one of these and assume it handles the rest. Start with the need, because the need decides who owns the policy and who receives the money.
General description of how each arrangement is designed to work. Ownership, funding and tax treatment for your business are attorney and CPA questions.
The gap I see most often: a funded buy-sell and very little personal coverage. The buyout pays your family for your shares. It does not replace your income, pay the mortgage or cover a loan you personally guaranteed.
Key person coverage is owned by the business and pays the business if someone it depends on dies: a founder, a rainmaker, the person the bank relies on. The money buys time to recruit, keep customers and cover lost profit while the business adjusts.
There is no legal formula for the amount. Carriers set their own financial underwriting limits and usually ask how the figure relates to the person’s compensation and to the business’s profit or value. Expect to provide financial statements or tax returns for larger amounts.
When a business owns a policy on an employee, including an owner who works in the business, section 101(j) of the Internal Revenue Code limits how much of the death benefit the business can exclude from income to the premiums it paid unless an exception applies and the employee was notified in writing and consented in writing before the policy was issued. IRS Notice 2009-48 says this applies even when the only employee is the person who owns the whole company. The business also has annual reporting under section 6039I.
The consent has to happen before issue, so I ask the question at application, not at delivery. Premiums on a policy the business benefits from are also generally not deductible under section 264(a)(1). Confirm both with your CPA.
A buy-sell agreement sets what happens to an owner’s share at death. Life insurance is what turns it from a promise into cash. There are two basic structures:
In Connelly v. United States (2024), a unanimous Supreme Court held that insurance proceeds a company receives to fund a redemption count as a company asset when valuing the deceased owner’s shares for estate tax, and the obligation to redeem does not offset them. If your agreement is an entity redemption written before mid-2024, have your attorney and CPA review it. More on Connelly and the structures attorneys are using.
Banks and SBA lenders sometimes require life insurance on an owner the business depends on. Under current SBA guidance the lender decides whether to require it and may follow its own policies for similar non-SBA loans, so the amount and term come from the lender’s commitment letter. The usual mechanism is a collateral assignment: you keep the policy, the lender is paid first up to the balance owed, and your beneficiary receives the rest. How a collateral assignment works.
From my 2026 casebook, described without names or carriers:
Completed placements from one practice, not predictions. Across all 39 cases I placed in 2026, the median time from application to decision was four days.
Most business needs have an end date, a loan term or the years until an owner retires, so term life usually fits. For reference, these are my own quotes for $500,000 of 20-year term at Preferred non-tobacco; business amounts are often larger, and health and amount both move the price.
Monthly premiums, 20-year term, $500,000, Texas, Preferred non-tobacco, quoted September 2026 (age 50 quoted October 2026). Illustrative, not a quote.
Permanent coverage can make sense for a buy-sell that has no end date or for estate liquidity, at a much higher premium. Term versus whole life.
I do not draft agreements, choose entity structures or give tax advice. I match the coverage to what your attorney, CPA or lender has asked for, compare it across 30+ carriers, make sure any section 101(j) notice and consent forms are signed before the policy is issued, and see the application through. If you are not sure which of these you need, a 15-minute call usually sorts it out.
Generally no. Internal Revenue Code section 264(a)(1) disallows a deduction for premiums on a life insurance policy when the business paying them is directly or indirectly a beneficiary. Confirm your situation with your CPA.
It can be. Under section 101(j), a business that owns a policy on an employee, including an owner who works in the business, can exclude the death benefit from income only up to the premiums it paid, unless an exception applies and the employee received written notice and gave written consent before the policy was issued. IRS Notice 2009-48 says this applies even to the sole owner of a wholly owned corporation. Ask your CPA before the policy is issued, not after.
That is a question for your attorney and CPA. Since Connelly v. United States (2024), insurance proceeds a company receives to redeem a deceased owner’s shares count as a company asset when valuing those shares for estate tax, and the redemption obligation does not offset them. Many owners with entity-redemption agreements written before mid-2024 are having them reviewed.
Not automatically. Under current SBA guidance the lender decides whether life insurance will be required and may follow its own written policies for similar non-SBA commercial loans. When it is required, the lender usually takes a collateral assignment of the policy rather than being named beneficiary. Get the requirement in writing from the lender before you apply.
It depends on the amount and the financial paperwork. Three $1 million collateral-assignment cases I placed in 2026 were decided in 1, 4 and 6 days. Larger amounts usually need financial statements or tax returns, and a foreign national owner’s case took three weeks.
Send me the lender letter, the buy-sell or your CPA’s note. I will match the coverage to it and compare it across 30+ carriers.
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