West Michigan builds businesses that outlive their founders. Sometimes.

A buy-sell agreement says what happens to ownership when a partner dies or exits; funding it with life insurance means the money to execute the buyout appears exactly when it’s needed. Death proceeds are generally income-tax-free under IRC §101(a), but when the company owns the policy (an entity-redemption design) they are tax-free only up to the premiums paid unless two conditions are met. First, before the policy was issued, the owner was told in writing that the company intended to insure their life, the maximum face amount, and that the company would be a beneficiary, and consented in writing to the coverage, including that it may continue after they leave. Second, one of the exceptions in IRC §101(j) applies — for example, the insured was an employee within the 12 months before death, or the proceeds are used to buy the deceased owner’s interest from their family or estate. The company also reports these policies each year on Form 8925. If you have partners and no funded agreement, the surviving families end up negotiating under the worst possible circumstances.

The business owns a policy on the person whose absence would materially hurt revenue — a founder, a rainmaker, the one engineer who knows the machines. Proceeds give the company breathing room to recover, recruit, and reassure lenders. Premiums are modest relative to the risk they retire.

Because the years before a sale are when cash flow is strongest and insurability is best — and a max-funded policy started now becomes the post-sale tax shelter that qualified plans can’t match once the W-2 income stops.