Insights

Leveraging Life Insurance in Business Succession: Protecting Value, Partners, and Legacy

by Sequoia Financial Group

November 6, 2026

For many business owners, a significant portion of personal wealth is tied to the company they have spent years building. That concentration can make business succession planning especially important. If an owner or key employee dies unexpectedly, the business may face questions about ownership, liquidity, leadership, and the financial needs of the owner’s family.

Life insurance can play a strategic role in a broader business succession plan by providing liquidity when it may be needed most.

How Can Life Insurance Support a Buy-Sell Agreement?

A buy-sell agreement establishes how an ownership interest may be transferred following certain triggering events, such as an owner’s death. Life insurance can provide a source of funds to help facilitate the purchase contemplated by the agreement.

Depending on the structure, policies may be owned by individual business owners or by the business itself. Following an insured owner’s death, proceeds can potentially provide liquidity to purchase the deceased owner’s interest rather than requiring the surviving owners or company to rely entirely on available cash, financing, or the sale of other assets.

Life insurance death benefits are generally excluded from a beneficiary’s gross income for federal income tax purposes, although exceptions and special rules can apply. 1

What is Key Person Life Insurance?

Succession planning is not limited to ownership. A company may also depend heavily on a founder, executive, rainmaker, or other key employee whose death could disrupt revenue, client relationships, operations, or leadership.

With key person life insurance, the business generally owns a policy on the individual and is the beneficiary. Proceeds following the insured’s death may provide capital as the organization navigates the transition.

Employer-owned policies also come with specific federal tax requirements. For certain employer-owned life insurance contracts, the Internal Revenue Code requires written notice and consent before a policy is issued, and businesses may have reporting obligations related to those policies. 2,3

How Can Life Insurance Fit into a Business Owner’s Estate Plan?

Business succession and estate planning are closely connected. Decisions about policy ownership, beneficiaries, business valuation, and the transfer of ownership interests can affect both the company and the owner’s broader estate plan.

For example, life insurance proceeds may be included in a decedent’s gross estate in certain circumstances, including when the decedent held specified “incidents of ownership” in the policy at death. 4 Transfers of existing policies can also create tax considerations under the transfer-for-value rules. 1

These details make coordination among financial, legal, tax, insurance, and valuation professionals particularly important.

When Should Business Owners Review Their Life Insurance Strategy?

A life insurance strategy should evolve alongside the business. Changes in company value, ownership percentages, leadership, debt, family circumstances, or succession objectives may affect whether existing coverage still aligns with the broader plan.

For business owners, the goal is not simply to purchase a policy. It may be to understand how insurance fits within a coordinated succession strategy; one designed to provide liquidity, support an orderly ownership transition, and help carry the business and family legacy forward.

At Sequoia Financial Group, we work with business owners to evaluate how succession planning fits within their broader financial lives, bringing together investment, tax, estate, insurance, and business planning considerations.

Sources

Internal Revenue Service, “Life Insurance & Disability Insurance Proceeds”
https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds
Internal Revenue Service, “Notice 2009-48: Treatment of Certain Employer-Owned Life Insurance Contracts”
https://www.irs.gov/irb/2009-24_IRB
Cornell Law School Legal Information Institute, “26 U.S. Code § 6039I — Returns and Records With Respect to Employer-Owned Life Insurance Contracts”
https://www.law.cornell.edu/uscode/text/26/6039I
Internal Revenue Service, “Instructions for Form 706”
https://www.irs.gov/instructions/i706

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Investment advisory services offered by Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment advisor does not imply a certain level of skill or training.