Buy-Sell Agreement Funding Calculator 2026: Cross-Purchase vs Entity Redemption vs Wait-and-See

A buy-sell agreement is a promise: when an owner dies, the surviving owners will buy that owner’s share, and the family will sell it at a price the document already defines. Writing the promise is easy. Keeping it is hard, because the obligation comes due at the worst possible moment, in the largest single amount the business has ever had to raise at one time. An unfunded agreement converts a partner’s death into a scramble for cash, a note the family may never collect, or a lawsuit.

This calculator prices the three ways to fund that promise. Enter your company value, the number of owners, your ownership stake, and the owners’ ages. The tool returns your buyout price, the funding gap left by coverage you already own, what each structure costs you per year, the income-tax exposure when the company owns the policies (IRC §101(j)), and the extra capital-gains tax an entity redemption creates by skipping the basis step-up.

What a Buy-Sell Agreement Actually Promises (and Why the Promise Needs Cash)

A buy-sell agreement is a contract among the owners of a business that answers one question in advance: what happens to your share when you die, retire, become disabled, or want to sell? The document sets the trigger events, the price, the buyer, and the deadline. What most agreements do not set is the money to close the deal. The legal obligation and the funding are two different projects, and slipping on the second one is what turns a well-drafted agreement into litigation.

Consider a three-owner company worth $2,000,000. When one owner dies, the surviving two owe roughly $666,000 — in cash, on a schedule the agreement defines, usually 30 to 90 days from the date of death. Banks do not lend against a dead owner's shares at that speed, and the family is not required to accept a promissory note the agreement did not authorize. Life insurance is the only asset that reliably produces the exact amount of cash required, at the exact moment it is required, and it does so without touching the company's working capital or the survivors' personal credit.

The Three Ways to Fund a Buyout

1. Cross-purchase. Each owner personally buys a policy on every other owner. When one dies, the surviving owners collect the proceeds personally and use them to buy the deceased owner's shares from the family. The policies are individually owned, so the death benefit is income-tax free under IRC §101(a) and no employer-owned life insurance rule applies. The arithmetic, though, is unforgiving: with N owners there are N × (N − 1) policies in the arrangement. Two owners need two policies, three owners need six, five owners need twenty. Each policy is written on a different life, so each carries its own premium, its own underwriting, and its own beneficiary designation.

2. Entity redemption (stock redemption). The company owns one policy on each owner and uses the proceeds to redeem the deceased owner's shares. That means just N policies — three policies instead of six — and the company pays the premiums with corporate dollars you already own a share of. The trade-off is tax structure. Because the company owns policies on its owners' lives, the contract is employer-owned life insurance, and the death benefit can be taxed unless specific statutory conditions are met (see §101(j) below). A second, quieter cost is that a redemption gives the surviving owners no step-up in basis on the shares that were redeemed, which increases their capital gain when the business is eventually sold.

3. Wait-and-see (unfunded). The agreement says "the survivors may buy, or the company may redeem, once the death occurs." No policy is purchased. The advantage is that the price is set later, when the facts are known, and the structure can be chosen then. The disadvantage is that the obligation arrives unhedged: if the company has no cash and the survivors have no credit, the family keeps shares in a business it cannot control, receive, or sell — and the surviving owners work alongside an unwilling new partner.

Video: Funding a Buy-Sell Agreement With Life Insurance

A short walkthrough of how the insurance side of a buy-sell agreement is structured — who owns the policy, who pays the premium, and who receives the proceeds when a partner dies.

How This Buy-Sell Funding Calculator Works

The engine answers five questions at once for the same set of facts. First, your buyout price: your ownership percentage multiplied by the business value, which is what the agreement must pay your family. Second, the funding gap: that price minus the life insurance already in force on you. Third, the cross-purchase cost: the premiums for the N − 1 policies you personally buy, each written on another owner's life for that owner's interest divided by the number of buyers. Fourth, the entity cost to you: the company's total premium multiplied by your ownership share, since corporate dollars spent on premiums are partly yours. Fifth, two tax numbers that separate the structures: the IRC §101(j) exposure on a company-owned policy when no notice and consent was obtained, and the capital-gains cost of the step-up you give up in a redemption.

Premiums come from the same 2026 rate table used in every calculator on this site (20-year term unless you change the term, per $1,000 of face, by age band, gender, health class and tobacco status), so the numbers here are internally consistent with our other tools. The model assumes every owner is priced at your age, gender and health class, which keeps a multi-owner comparison readable; state on the assumptions page of your agreement if the owners' ages differ materially, because an older owner's premium can be several times a younger one's.

IRC §101(j): The Rule That Can Tax a Company-Owned Death Benefit

Congress closed a loophole in 2006. Under IRC §101(j)(1), when a business owns a life insurance contract on an employee or owner, the amount excluded from the policyholder's gross income is limited to the premiums and other amounts it paid for that contract. In plain English: with a company-owned policy, the death benefit above the premiums paid can be taxable income to the business — the opposite of the tax-free treatment everyone expects.

The exception is where planning lives. Section 101(j)(2) turns that limit off entirely when two conditions are met. First, the notice and consent requirements of §101(j)(4): before the contract is issued, the insured must be told in writing that the business intends to insure the employee's life and the maximum face amount, must give written consent (including consent to continued coverage after employment ends), and must be told in writing that the business will be a beneficiary. Second, the insured must either have been an employee at any time during the 12 months before death, or have been a director, a highly compensated employee under §414(q), or a highly compensated individual under §105(h)(5) when the contract was issued.

Then comes the provision that makes a funded redemption work. Section 101(j)(2)(B) also preserves the exclusion for amounts paid to the insured's family, to a designated beneficiary, or to the insured's estate — and, critically, for amounts used to purchase an equity interest in the policyholder from those people. Because a funded buyout spends the proceeds buying the deceased owner's shares from the family, the death benefit stays income-tax free even though the company owned the policy. The catch is that §101(j)(2) only applies to contracts for which the notice and consent requirements were satisfied. No paperwork, no exception, and the calculator's exposure figure becomes real.

Two administrative points follow. Every applicable policyholder that owns employer-owned contracts issued after August 17, 2006 must report them annually on IRS Form 8925, and the notice and consent forms must be retained — they are the evidence that decides the tax outcome years later. If your company already owns the policies and nobody can produce a signed consent, tool the exposure above immediately; the fix is prospective (new coverage issued with clean paperwork), not retroactive.

The Basis Step-Up: The Quiet Cost of an Entity Redemption

Basis is what you subtract from a sale price to compute taxable gain. In a cross-purchase, the surviving owners buy the deceased owner's shares directly, so their basis in those shares equals the price they paid — the full buyout amount lands in their basis, and a later sale of the business produces that much less capital gain. In an entity redemption, the company buys and cancels the shares, and the survivors' outside basis is unchanged. The same dollars changed hands, but the tax basis did not follow them.

The calculator quantifies that asymmetry with a capital-gains rate you choose (15%, 18.8%, 20%, or 23.8% including the net investment income tax). At 23.8%, a $680,000 buyout that skips the step-up creates roughly $161,840 of additional capital-gains tax in the survivors' hands when they eventually sell. That is money paid years later, which is exactly why it gets ignored — and exactly why it belongs in a structure comparison.

What a Funded Buyout Looks Like: Five Worked Examples

Ownership	Your buyout price	Funding gap (after typical coverage)	Your cost — cross-purchase	Your cost — entity	§101(j) exposure (no consent)
2 equal owners, $1.2M company, age 45, $0 existing	$600,000	$600,000	$3,312/yr	$3,312/yr	$119,045
3 equal owners, $2M company, age 50, $250K existing	$680,000	$430,000	$5,306/yr	$5,467/yr	$131,319
4 equal owners, $5M company, age 55, $500K existing	$1,250,000	$750,000	$15,150/yr	$15,150/yr	$230,685
3 owners, $8M company, 15% minority, age 40, $1M existing	$1,200,000	$200,000	$13,056/yr	$4,608/yr	$242,323
5 equal owners, $12M company, age 60, $750K existing	$2,400,000	$1,650,000	$44,640/yr	$44,640/yr	$410,256

Read the middle column carefully, because it contains the least intuitive result in buy-sell planning. When owners hold equal stakes and are priced at the same age and class, a cross-purchase and an entity redemption cost the same for your share — the difference is purely structure, tax and administration. The gap opens when stakes are unequal. In the fourth row, a 15% minority owner pays $13,056 a year in a cross-purchase against $4,608 in an entity arrangement, because a cross-purchase makes each owner personally insure the other owners' much larger interests. Minority owners usually prefer the entity route; majority owners often prefer the cross-purchase because it keeps the value of the step-up.

Cross-Purchase vs Entity Redemption vs Wait-and-See

Feature	Cross-purchase	Entity redemption	Wait-and-see
Policies required for N owners	N × (N − 1)	N	None
Who pays the premium	Each owner personally	The company	Nobody
Death benefit income tax	Free — IRC §101(a)	Free only with notice and consent, or when proceeds buy the interest — §101(j)(2)	Not applicable
Basis step-up for survivors	Yes — purchase price becomes basis	No — redeemed basis disappears	Whichever structure is chosen later
Creditor exposure of the cash	Owner-level, but funded at death	Corporate creditors may reach company-owned cash value	None held
Number of owners at death	Drops by one immediately	Drops by one immediately	Optional — the survivor may decline
Administrative burden	High — many policies, many assignments	Low — one policy per owner	Lowest until the trigger

How Much Coverage Does Each Owner Actually Need?

Each policy is sized to the insured owner's interest, not to the whole company. In a three-owner company worth $2,000,000, an equal-stake owner needs $666,667 of coverage — not $2,000,000 — and in a cross-purchase that amount is split among the N − 1 policies held by the other owners. Sizing every policy to the full business value is the most common (and most expensive) error in funded buy-sell planning, and it hands the family a death benefit the agreement never required.

Age at issue	Male — $500,000, 20-year term	Female — $500,000, 20-year term
30	$105/mo	$85/mo
35	$120/mo	$95/mo
40	$160/mo	$130/mo
45	$230/mo	$185/mo
50	$335/mo	$260/mo
55	$505/mo	$380/mo
60	$775/mo	$580/mo

The table uses the same rate model as the calculator above: 20-year term, standard (good) health class, non-tobacco, per $1,000 of face. Multiply by the insured's interest divided by $500,000 to size your own number. Note that these are monthly costs per policy — in a cross-purchase with several policies, the totals add up across lives, which is why the buy-sell math above reports your outlay rather than the premium on a single policy.

Term or Permanent Coverage for Buy-Sell Funding?

A buy-sell obligation does not expire on its own. Term insurance does — and a 20-year term bought at 45 is exhausted at 65, which is precisely when partners start retiring or dying and the obligation is most likely to be called. Three practical approaches dominate. The simplest is term sized to the working horizon, replaced or supplemented if the obligation outlives it. The most durable is permanent coverage (whole life or a guaranteed universal life), which never expires, builds cash value the company can borrow against, and locks in insurability at the age the policy was issued. The most flexible is term with a conversion privilege, which lets the buyer convert to permanent at the original health class later, when the business can afford it or when a partner's health changes.

Watch three mechanics regardless of the product chosen. The policy's owner must match the structure: in a cross-purchase the buyer owns the policy on the seller, and in a redemption the company does. The beneficiary must be the party obligated to buy — not the insured's spouse. And in a redemption, the agreement should require the company to use the proceeds to redeem the shares within a stated window, because that use is what preserves the §101(j)(2)(B) exclusion.

Mistakes That Break a Buy-Sell Agreement

1. Leaving the agreement unfunded. A promise to buy without cash behind it is a promise the survivors cannot keep, and courts read them strictly.
2. No written notice and consent. A company-owned policy without the §101(j)(4) paperwork converts a tax-free death benefit into taxable income above the premiums paid.
3. Sizing every policy to the full business value. Coverage should equal the insured owner's interest, not the enterprise.
4. Naming the wrong beneficiary. If the spouse is the beneficiary instead of the buyer or the company, the money that was supposed to fund the buyout walks out of the transaction.
5. Failing to name a disability trigger. Death is not the only exit; a buy-sell that ignores long-term disability leaves a permanently disabled owner holding shares the company cannot redeem.
6. Using a stale valuation. Buy-sell prices that were set in 2019 and never updated create either a bargain for the buyer or a windfall the seller's estate must defend.
7. Term coverage that expires first. A term policy that lapses before the obligation does silently unfunds the agreement.
8. Mixing structures on paper. The agreement says cross-purchase, the policies are company-owned, and the beneficiary is a spouse — three documents, three intentions, one lawsuit.

Steps to Fund Your Buy-Sell Agreement in 2026

1. Agree the valuation method and the review cadence — annual updates, or a formula tied to earnings and a multiple.
2. Choose the structure: cross-purchase, entity redemption, or wait-and-see with an option to redeem.
3. Size coverage to each owner's interest, then subtract any existing policies that will be assigned to the arrangement.
4. Obtain the written notice and consent required by IRC §101(j)(4) before any company-owned policy is issued, and file the forms with the policy.
5. Have a qualified appraiser or underwriter place the coverage, and name the correct owner and beneficiary on every policy.
6. Cross-reference the agreement and the policies: each document should name the other, the structure, and the required use of the proceeds.
7. Report employer-owned contracts annually on IRS Form 8925 and retain the consents indefinitely.
8. Review the file every two years, or immediately after any ownership, valuation, or health change.

Key Takeaways

• A buy-sell agreement creates an obligation; only funding creates the cash. Size the coverage to each owner's interest, not to the business value.
• A cross-purchase needs N × (N − 1) policies but keeps the death benefit outside IRC §101(j) and preserves the basis step-up for survivors.
• An entity redemption needs only N policies and is income-tax free when notice and consent were obtained and the proceeds buy the interest — §101(j)(2)(B)(ii).
• Without notice and consent, the exclusion is capped at premiums paid, which is the exposure figure this calculator reports as a dollar tax bill.
• Redemptions skip the step-up: at a 23.8% rate, a $680,000 buyout creates roughly $161,840 of extra capital-gains tax later.

Frequently Asked Questions

What is a buy-sell agreement and how does life insurance fund it?

A buy-sell agreement is a contract that requires a departing owner's interest to be sold to the surviving owners (cross-purchase) or to the company (redemption) at a price and on a schedule the document sets. Life insurance funds it by creating the exact amount of cash, at the moment the obligation is triggered, without drawing on the company's working capital or the survivors' credit. The policy is owned by the party obligated to buy, and its beneficiary is that party — not the insured's family.

Is a cross-purchase or an entity redemption better for funding a buyout?

It depends on the ownership mix. With equal stakes and owners of similar age, both cost roughly the same per owner, so the decision turns on tax and administration: cross-purchase policies are never employer-owned and give survivors a full step-up in basis, while a redemption needs fewer policies but requires §101(j) compliance and gives up the step-up. With unequal stakes, a minority owner usually pays far less under a redemption, because a cross-purchase makes that owner personally insure the majority owners' much larger interests.

Can a company-owned death benefit be taxed even though life insurance is usually tax-free?

Yes. IRC §101(j)(1) limits the exclusion for employer-owned life insurance contracts to the premiums and other amounts the policyholder paid — so the death benefit above that amount is includible in income. The limit does not apply if the notice and consent requirements of §101(j)(4) were met before issuance and the insured was an employee within 12 months of death (or a director or highly compensated individual when the contract was issued), or if the proceeds are paid to the insured's family or used to purchase the insured's equity interest in the business.

How much life insurance does each owner need in a buy-sell arrangement?

Each policy should equal the insured owner's share of the business value, divided among the buyers who must purchase that share. In a three-owner company worth $2,000,000 with equal stakes, each owner's interest is about $666,667; in a cross-purchase each of the other two owners holds a policy on that life for roughly $333,333. Buying coverage equal to the full company value on every owner overfunds the arrangement and inflates premiums.

What happens if the buy-sell agreement is never funded?

The survivors still owe the purchase price, but they must raise it from cash flow, personal savings, or credit — usually within 30 to 90 days of the death. If they cannot, the family keeps shares in a business it cannot run, sell, or easily value, and the surviving owners work alongside an unwilling partner. That is the practical outcome of a wait-and-see agreement with no funding mechanism, and it is the single most common reason buy-sell disputes end up in court.

Does the buyout price in the agreement ever change?

It should. A fixed price set years earlier either cheats the estate (if the business has grown) or overpays the estate (if it has shrunk), and both outcomes invite a challenge. Most well-drafted agreements use a valuation formula — a multiple of earnings, book value, or a professional appraisal refreshed annually — and state which method controls if the parties disagree. The IRS will also require fair market value for estate tax purposes regardless of what the agreement says, unless the agreement meets the restrictive conditions of IRC §2703.

Can an existing personal life insurance policy be used to fund a buy-sell agreement?

Often yes, by assigning ownership to the party that must buy the interest, but the transfer needs planning. IRC §101(a)(2) generally limits the exclusion when a policy is transferred for valuable consideration — with exceptions that include transfers to the insured, to a partner of the insured, to a partnership in which the insured is a partner, and to a corporation in which the insured is a shareholder or officer. A transfer to a co-owner who is not a partner in a separate partnership can taint the death benefit, so the assignment should be documented with the advice of a tax professional.

Related Tools and Resources

• Read the companion guide to the legal document itself: buy-sell agreement life insurance.
• Value a single key employee with the key person life insurance calculator.
• Cover the exit that is not death with the disability buy-sell agreement overview.
• Fund an executive benefit the same tax way with the Section 162 executive bonus plan.
• See why personal coverage still matters next to a company plan in the group life insurance guide.
• IRS Form 8925, Report of Employer-Owned Life Insurance Contracts — the annual filing that applies to company-owned policies issued after August 17, 2006.
• IRS Publication 551, Basis of Assets — how basis is determined when shares are purchased versus redeemed.
• NAIC consumer resources — state insurance department guidance on policy ownership and beneficiaries.
• AM Best insurer ratings — check financial strength before funding a long-horizon buyout obligation.

Next Step: Put the Funding in Place Before the Trigger

A buy-sell agreement is only as strong as the cash behind it. Sizing the coverage to each owner's interest, choosing the structure deliberately, and completing the notice and consent paperwork are three afternoons of work that decide whether your family receives a check or a promissory note. Start with the number this calculator produced: your buyout price, minus the coverage already in force.

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