How to Fund a Buy-Sell Agreement with Life Insurance

By Alfredo Maradiaga, licensed group benefits advisor · AI+Trust Advisory · Updated 2026-07-30

What a buy-sell agreement actually does — and why it needs cash

A buy-sell agreement is a legally binding contract you and your co-owners sign during good times, spelling out what happens to an owner's shares if they die, become disabled, retire, or want out. It answers two questions in advance: who buys the departing owner's shares, and at what price? Without it, a deceased owner's shares pass to their estate — often a spouse or adult children who may have no interest in running your business but every right to a seat at the table. But if that money isn't sitting somewhere, the survivors are stuck financing a large purchase out of cash flow, a bank loan, or a fire sale of assets — right when the business has also lost a key contributor. This is the gap life insurance fills. You buy coverage today so that on the day an owner dies, a tax-effective death benefit lands exactly where the agreement says the money should be. The estate gets fair value in cash. The surviving owners keep full control. The business survives the transition instead of being crippled by it. Think of it as two separate jobs done by two separate documents: the buy-sell agreement is the legal machinery, and the life insurance is the fuel. One without the other leaves you exposed — a funded agreement with no policy is a promise you can't keep, and a policy with no agreement is money with no instructions.

The two main ways to structure the funding

There are two standard ways to hold the insurance behind a buy-sell, and the choice affects taxes, ownership, and what happens to the money. This is where your lawyer and accountant earn their fee — but you should understand the shapes before you walk into that meeting.

Criss-cross (personally owned). Each owner personally buys and owns a policy on the *other* owner(s). If you and one partner each own half the company, you buy a policy on their life and they buy one on yours. When your partner dies, you personally receive the death benefit and use it to buy their shares from their estate. This is clean and simple with two owners, but it gets messy fast — three owners means six policies, four owners means twelve. The premiums also aren't shared evenly if the owners are different ages or in different health.

Corporate-owned (COLI). The company itself owns and is the beneficiary of a policy on each owner's life. When an owner dies, the corporation receives the death benefit and uses it to redeem the deceased owner's shares. This is usually simpler to administer with more than two owners, and the corporation may be able to credit part of the death benefit to its capital dividend account (CDA) — a mechanism that can let the proceeds flow out to shareholders more tax-efficiently. The CDA rules are technical and change with the structure, so confirm the treatment with your accountant before assuming any benefit.

There's no universally 'right' answer — it depends on the number of owners, the age gap between them, whether the company holds cash, and how your accountant wants to handle the tax. What matters is that the ownership of the policy matches the mechanics of your agreement. A common and expensive mistake is buying policies in one structure while the lawyer drafts the agreement for another.

Term or permanent — matching the policy to the need

The insurance behind a buy-sell can be term or permanent, and picking the wrong one either wastes premium or leaves you uncovered at the worst time.

Term insurance covers a set period — 10, 20, or 30 years — at a lower initial premium. It fits a temporary need: owners in their 30s and 40s who plan to sell, retire, or wind down the business well before old age, and a company that would rather keep premium low today. The risk is that the need outlives the term. If an owner intends to stay active into their late 60s or 70s and the policy expires at 65, the buy-sell is suddenly unfunded exactly when a death is most likely.

Permanent insurance — whole life or universal life — covers the owner for life and builds cash value inside the policy. It fits a permanent need: an owner who'll stay past 70 or 75, or a business that wants the coverage locked in regardless of future health. The cash value adds flexibility the reference material specifically flags: if a partner leaves for a reason *other* than death — retirement, a falling-out, a change of direction — those accumulated values can help fund a living buyout or supplement the departing owner's retirement.

A practical middle path many Alberta owners use is a layered approach: a permanent base to cover the portion of the business that will always need funding, plus a term layer that matches a growth phase or a debt you expect to pay down. As the business matures and the temporary need falls away, you drop the term layer and keep the permanent core. The right mix depends on your timeline, your cash position, and each owner's health — which is exactly the kind of trade-off an independent broker sizes for you.

A worked example: two-owner Alberta contracting company

Take a fictional Edmonton-based electrical contracting company, owned 50/50 by two partners in their late 40s. They sign a buy-sell agreement requiring the surviving owner to buy out the deceased owner's shares at that agreed value. To fund it, they choose a criss-cross structure because there are only two of them. Because both partners are healthy and in their 40s, they opt for a mix: a permanent base to cover the portion of the business they expect to run for decades, plus a term layer tied to the equipment loan they're paying down over the next 12 years. The deceased partner's spouse receives fair market value in cash instead of inheriting shares in a business they can't run. The company keeps its equipment, its crew, and its bonding capacity. These figures are an example only — the real premium depends on each owner's age, health, smoking status, coverage amount, and policy type, and the valuation should be reviewed regularly as the business grows. The point isn't the exact dollars; it's that the coverage is sized to the *actual share value*, not a round number someone guessed. Under-fund it and the survivor is short the cash to complete the buyout the agreement obligates them to make.

What makes the coverage amount and premium go up or down

Two owners can have very different buy-sell insurance costs, and it's worth knowing what drives the number before you're surprised by a quote.

What moves the coverage amount:

• Business value — the higher the agreed share value, the more death benefit needed. A growing company needs its coverage revisited, or it slowly becomes underfunded.
• Ownership split — a 70/30 partnership needs different amounts on each life, not one equal figure.
• Corporate debt — some agreements factor in retiring the company's debt as part of the transition, which raises the amount.
• Number of owners — more owners means more policies, and criss-cross arrangements multiply quickly.

What moves the premium for the same coverage:

• Age — the single biggest lever. Locking in coverage in your 40s costs materially less than starting in your 60s.
• Health and medical history — underwriting is individual; a controlled condition can still be insurable at a rating.
• Smoking or vaping status — non-smoker rates are significantly lower.
• Term vs. permanent — term is cheaper upfront; permanent costs more but builds cash value and never expires.

Because premiums are driven by each individual owner's profile, an owner who's older or has a health history can quietly become the expensive part of a criss-cross arrangement — sometimes enough to make a corporate-owned structure or a different design worth considering. This is a real advantage of working with an independent broker: comparing Canada Life, Manulife, Sun Life, Empire Life and Co-operators on the same case can produce meaningfully different offers for the same owner, and no single carrier wins every profile.

The mistakes that cost owners money

Most buy-sell funding failures aren't dramatic — they're small oversights that surface at the worst possible moment. Here are the ones that actually cost Alberta owners real money. Mismatch between the agreement and the policies. The lawyer drafts a corporate redemption while the owners bought personally owned criss-cross policies — or vice versa. When a death happens, the money is in the wrong hands and the tax treatment doesn't line up. The death benefit covers less than half the current share value, and the survivor has to find the rest. Buy-sell coverage should be reviewed on a set schedule, not set and forgotten. Ignoring disability. Owners insure against death and forget that a partner is statistically more likely to be sidelined by a long-term disability or a critical illness. A buy-sell can also be triggered by disability — and there are disability buy-sell and critical illness options designed to fund that scenario. A death-only plan leaves a real gap open. Letting term coverage expire while the need continues. An owner plans to retire at 60, buys 15-year term at 45, then keeps working. At 60 the policy ends and the buyout is unfunded during the highest-risk years. Match the coverage period to how long the owner will actually be involved. Assuming the tax treatment without confirming it. The capital dividend account, the adjusted cost basis of corporate-owned policies, and how proceeds flow to shareholders are genuinely complex. Assuming a tax outcome the accountant never signed off on is how a 'funded' plan turns into an unexpected tax bill. Confirm the treatment in writing before you sign.

Questions to ask before you sign anything

Whether you're setting up your first buy-sell or reviewing one that's been in a drawer for years, walk in with these questions. They separate a plan that works from a plan that looks fine on paper.

• Does the coverage match the current share value? Ask for the valuation the amount is based on and when it was last updated. If nobody can answer, the number is a guess.
• Does the policy ownership match the agreement structure? Confirm the lawyer and the broker have seen each other's work — criss-cross vs. corporate-owned has to be consistent across both documents.
• What triggers the buyout? Death is standard. Ask whether disability, critical illness, retirement, or a shareholder dispute also trigger it — and whether those are funded or just written down.
• Is it term or permanent, and does the term outlast the need? Check the expiry date against how long each owner realistically stays involved.
• Who confirmed the tax treatment? Ask your accountant to confirm the CDA and capital-gains handling in writing before you rely on it.
• Have carriers been compared? For the same owner and the same coverage, different carriers can offer different premiums and different underwriting outcomes. An independent broker should be able to show you why one carrier was chosen.

A buy-sell agreement is one of the few things you build hoping you'll never use it — which is exactly why it gets neglected. If yours hasn't been reviewed against your current business value, or you've never funded one at all, that's the gap worth closing this year. Book a free business protection review and we'll size the coverage to your real numbers, compare carriers, and coordinate the design with your lawyer and accountant.