Business · 5 min read · Updated November 10, 2026

Buy-sell funding options in depth

Illustrative examples, education not advice.

In plain words

A buy-sell agreement sets the rules for what happens to an owner’s share if they die, become disabled, retire, divorce or leave. Usually it says the business or the other owners will buy that share at a fair price.

The agreement answers “who buys, and at what price.” The funding answers the harder question: “where does the money come from?” A $2 million promise with no money behind it can sink the business and leave the departing owner’s family waiting years to be paid.

There are five main ways to fund a buyout. Most solid plans use more than one.

The five funding options

Option	How it works	Strengths	Weaknesses
Cash on hand	Business or owners pay from savings	No interest, no underwriting	Rarely enough; drains working capital
Bank loan	Buyer borrows the purchase price	Fast if credit is strong	A business that just lost an owner may not qualify; adds debt
Installment note	Buyer pays the seller or estate over years	Flexible; no lender needed	Family depends on the business’s future success; risk of default
Sinking fund	Business saves toward the buyout over time	Builds discipline	Takes years to build; may not be ready in time; may be taxed
Insurance	Life and disability buy-out policies pay when the event happens	Money arrives when needed, generally income-tax-free for life insurance	Ongoing premiums; underwriting; only covers insured events

Matching the funding to the event

Death: life insurance is usually the most reliable source, because it pays exactly when the money is needed.
Disability: a disability buy-out policy can fund a purchase after a long waiting period, often 12 to 24 months. It can pay a lump sum or installments.
Retirement or leaving: insurance generally does not pay. Cash value in permanent policies, a sinking fund, or an installment note are common. Many plans use a down payment plus a note.
Divorce or dispute: usually cash and installment notes, set by the agreement.

How it helps real people

The family gets paid a fair price, promptly, instead of waiting on the business.
The surviving owners keep control, without a partner’s heirs or ex-spouse at the table.
The business keeps its credit, because it does not take on sudden debt.
Customers, staff and lenders stay confident that the business will continue.

A worked example

Illustrative. Ana and Ben, both 49, are fictional and own an engineering firm 50/50, valued at $3 million. Their agreement uses a valuation formula updated every year.

Funding plan:

Death: a cross-purchase arrangement, with each owning a $1.5 million life policy on the other. Some of the coverage is permanent to build cash value toward a retirement buyout.
Disability: a disability buy-out policy on each, paying a lump sum after an 18-month wait.
Retirement: 25% down payment, using policy cash value and business savings, plus a 7-year installment note for the rest.

When Ben has a stroke at 54 and cannot return to work, the disability buy-out policy funds most of Ana’s purchase of his share. His family receives a lump sum. Ana keeps the business and its staff.

Why cross-purchase? After the 2024 Supreme Court decision in Connelly v. United States, insurance owned by the company to fund a redemption can increase the value of the company for estate tax purposes. Many owners are reviewing whether a cross-purchase or another structure fits better. See our article on buy-sell agreements after Connelly.

These figures are illustrative only and not a quote or legal design.

Who it’s for

Any business with two or more owners.
Single-owner businesses with a key employee or child who could buy them out.
Professional practices, family companies and partnerships with personal guarantees.

Who it’s not for

A sole owner with no likely buyer may focus on key person cover and a sale plan instead.
Businesses where all owners are uninsurable may rely more on notes and sinking funds, with the risks that brings.

Risks and trade-offs

Underfunding. A business valued at $3 million in 2020 may be worth $5 million today. Update coverage when value changes.
Ownership structure and tax. Who owns the policies (company, owners or a trust) changes the tax result and estate value. Post-Connelly, this matters more.
Employer-owned life insurance rules. For company-owned policies on employees, federal law generally requires written notice and consent before the policy is issued, or the death benefit may become partly taxable. The company also files an annual information return.
Installment notes put the family at risk if the business struggles after the owner leaves.
Disability definitions in the agreement and the policy should match.
Premiums for older or less healthy owners can be high.

Common mistakes

No funding at all, just an agreement.
Valuation never updated, so coverage and price are stale.
Missing the notice-and-consent paperwork for company-owned policies.
No plan for disability or retirement, only death.
Too many policies in a cross-purchase with many owners. A trust or partnership can hold them more simply.

FAQs

What is the difference between cross-purchase and entity purchase?

In a cross-purchase, the owners buy each other’s shares and own policies on each other. In an entity purchase (redemption), the company buys the shares and owns the policies. Each has different tax and estate results.

Can permanent life insurance fund a retirement buyout?

Cash value can help. It builds slowly in the early years, and using it reduces the death benefit. It works best combined with other sources.

How often should we update the valuation?

Many agreements require yearly or every-other-year updates. A stale value is one of the most common buy-sell problems.

What if one owner cannot get insurance?

The plan can use a sinking fund, installment note, or insurance on other parties, and the agreement can set different terms.

Your next step

Talk to a strategist about testing whether your buy-sell funding covers death, disability and retirement at today’s business value.

Education, not advice. Examples are illustrative. VeraLife.ai is not a registered investment adviser, broker-dealer or insurance agency.