You've spent decades building your business. Late nights, tough decisions, countless sacrifices—it's more than just a company. It's your legacy. But here's the uncomfortable truth: when you die, someone needs to take over. And without a solid plan in place, your family could lose everything you've worked for.
That's where life insurance for business succession comes in. It's not just about replacing your income or paying off debts. It's about making sure your business can continue operating, your partners get bought out fairly, and your family receives the value you've created—without forcing a fire sale or drowning in estate taxes.
Why Most Business Owners Don't Have a Succession Plan
Here's a sobering statistic: about two-thirds of U.S. family businesses don't have a formal succession plan. Why? Because thinking about your own death is uncomfortable. Because you're too busy running the business. Because you assume your kids or partners will just figure it out.
But when a business owner dies without a plan, the fallout is brutal. Surviving partners might not have the cash to buy out your share. Your family might be forced to sell quickly at a fraction of what the business is worth. Estate taxes—which can run up to 40% on amounts over the exemption—might force the sale of business assets just to pay the IRS.
And here's the kicker: the federal estate tax exemption is $13.99 million in 2025. Sounds like a lot, right? But it's scheduled to drop to around $7 million in 2026. If your business is worth more than that—and many successful small businesses are—your heirs could face a massive tax bill. Life insurance can provide the liquidity to pay those taxes without liquidating the business.
How Life Insurance Funds Business Succession
Life insurance is the most common way to fund a buy-sell agreement—essentially a contract that spells out what happens to your business ownership when you die, retire, or become disabled. The insurance policy pays out a death benefit that gives your partners or heirs the cash they need to execute the agreement.
There are two main structures. In a cross-purchase agreement, each partner owns a life insurance policy on the other partners. When you die, your partners receive the death benefit and use it to buy your share from your estate. This keeps ownership in the hands of the surviving partners and often provides favorable tax treatment for them since they get a step-up in basis.
In an entity-purchase agreement, the business itself owns the policies and is the beneficiary. When you die, the company uses the death benefit to buy back your shares from your estate. This structure is simpler to administer, especially with multiple owners, but it comes with important tax considerations.
Family Buyers vs. Outside Buyers: Different Approaches
Transferring your business to family members creates a unique set of challenges. Maybe you want your daughter to take over, but she doesn't have the cash to buy out your other partners. Maybe you have three kids, but only one wants to run the business—how do you treat everyone fairly?
Life insurance can equalize inheritances. You can leave the business to the child who wants to run it, and use life insurance proceeds to provide equal value to your other children. This prevents resentment and family conflict after you're gone. The death benefit gives your non-business heirs immediate cash, while the business continues operating under new family leadership.
If you're planning to sell to an outside buyer instead, life insurance plays a different role. Key person insurance protects the business value during the transition. If you die before the sale is complete, the death benefit can compensate for the loss of your expertise and relationships, maintaining the business value for the buyer. It also gives your estate the time to find the right buyer at the right price, rather than accepting a lowball offer out of desperation.
Estate Planning and Liquidity: The Real Benefits
When you own a successful business, most of your net worth is probably tied up in that business. Your estate might be worth $15 million on paper, but if $12 million of that is your business equity, your family has a problem. They owe estate taxes in cash, but the money is locked in the business.
This is where life insurance creates liquidity. The death benefit provides immediate cash that can pay estate taxes, outstanding business debts, and ongoing expenses while the business transition happens. Your family won't be forced to sell the company at a discount or take out expensive loans just to pay the tax bill.
Life insurance also protects your employees and vendors. When a business owner dies, suppliers might demand immediate payment, worried about the company's future. Key employees might start looking for new jobs. The death benefit can reassure everyone that the business is financially stable during the transition, preventing a talent exodus or supply chain disruption that could tank the company's value.
How to Get Started with Business Succession Planning
First, get your business valued by a professional. You can't structure a proper buy-sell agreement or determine how much life insurance you need without knowing what your business is actually worth. Business valuations should be updated every few years as the company grows.
Next, work with an attorney who specializes in business succession to draft a buy-sell agreement. This document should spell out exactly what happens to your ownership stake when you die, who can buy it, at what price, and under what terms. Your agreement should be reviewed regularly—especially in light of recent court decisions like Connelly that change the tax landscape.
Then, talk to a life insurance professional about the right type and amount of coverage. Term life insurance is cheaper and works well if you're planning to sell or retire within a specific timeframe. Permanent life insurance costs more but provides coverage for your entire life and can build cash value the business can access if needed.
Finally, communicate your plan to your family and business partners. The best succession plan in the world doesn't work if nobody knows about it. Make sure your family understands what will happen to the business when you die, and ensure your partners or successors are prepared to execute the plan.
Your business is your legacy. With proper succession planning funded by life insurance, you ensure that legacy continues—whether in your family's hands or transferred to new owners who will build on what you've created. Don't wait until it's too late. Start the conversation today.
