Buy-Sell Agreement Insurance Calculator

What this buy-sell agreement insurance calculator does

This calculator estimates how much life insurance coverage is needed to fund a buy-sell agreement for a business owner or partner. By entering the current business value and a partner’s ownership percentage, you can see an approximate death benefit that would allow surviving owners or the business entity to buy out that owner’s share if they die.

Use the output as a starting point for conversations with your attorney, CPA, and insurance advisor. It is not a substitute for a formal business valuation or legal advice.

How buy-sell agreement insurance works

A buy-sell agreement is a legally binding contract that says what happens to an owner’s interest if they die, become disabled, retire, or leave the business. Life insurance is commonly used to provide cash at death so that the remaining owners (or the company) can purchase the deceased owner’s interest from their estate or heirs.

Without insurance funding, surviving partners may have to:

• Take out loans or use personal savings to buy out the deceased owner’s share.
• Admit new, possibly unwanted, partners such as family members or outside buyers.
• Sell or liquidate the business if they cannot finance the buyout.

With properly structured buy-sell agreement insurance, the death benefit can be used to carry out the agreement at a pre-determined or formula-based price, preserving control and continuity.

Basic formula used in this calculator

This tool uses a simple proportional formula based on the total business value and an owner’s percentage interest:

Expressed numerically:

• Business value: current estimated total value of the company (for 100% of the equity).
• Ownership percentage: that partner’s share of ownership, written as a percentage (for example, 50% or 25%).
• Coverage: approximate life insurance death benefit needed to purchase that owner’s interest if they die.

The calculator does not determine how many policies are needed or who should own them; it focuses on the coverage amount per owner’s interest.

Cross-purchase vs. entity-purchase structures

Buy-sell agreement insurance is usually arranged in one of two main ways. The coverage estimate from this tool can be applied under either structure, but the ownership and number of policies differ.

In both cases, the policy death benefit on a given owner is often set close to the estimated value of that owner’s interest in the business, which is what this calculator helps you approximate.

Reading the coverage examples

The sample coverage values below assume a straightforward valuation and round numbers. They are for illustration only and are not recommendations.

For example, in a business valued at $1,000,000, a 25% owner might target roughly $250,000 of death benefit to cover their ownership interest. If the same business has two 25% owners and one 50% owner, each owner would generally look at coverage based on their own share.

Worked example using the calculator

Consider a business estimated to be worth $3,000,000 with three equal partners.

1. Enter $3,000,000 as the current business value.
2. Enter 33 (or 33.3) as the partner ownership percentage.
3. Enter 3 as the total number of partners (for your reference).

The calculator will estimate coverage of roughly $1,000,000 for that partner (33.3% of $3,000,000). In practice, you and your advisors might round this amount, coordinate coverage across all partners, and update it as the business’s value changes.

How to interpret your results

The coverage amount shown is an estimate of the value of the partner’s ownership interest today, under a simple proportional method. You can use it to:

• Check whether existing policies are broadly aligned with current ownership and value.
• Start discussions about increasing or decreasing coverage.
• Compare different ownership scenarios (for example, bringing in a new minority partner).

It is common to review buy-sell coverage after events such as:

• Significant changes in revenue, profit, or market conditions.
• Admitting or buying out partners.
• Substantial new borrowing or capital investment.
• Updates to the written buy-sell agreement itself.

Key assumptions and limitations of this calculator

This tool simplifies many real-world factors. Important assumptions and limitations include:

• Current agreed value: It assumes you have a reasonable current estimate of the total business value. Formal valuations may produce different numbers.
• Straightforward ownership: It assumes each partner’s ownership percentage is clear and not subject to vesting, preferred shares, or complex capital structures.
• No tax or discount adjustments: It does not account for taxes, valuation discounts (such as lack of marketability or minority interest discounts), or premiums that may apply under a formal valuation.
• Death-only funding: It focuses on life insurance for death scenarios and does not address disability, retirement, or voluntary exit funding.
• Static snapshot: Results reflect a point in time. Business values can change quickly, and coverage may become too high or too low if not reviewed.
• Underwriting and product design: It does not consider what types of policies you qualify for, how premiums are structured, or how long coverage should last.

Because of these limitations, always use the calculator as a starting estimate rather than a final decision tool.

Next steps and professional guidance

After estimating coverage with this tool, consider:

• Reviewing your existing buy-sell agreement to confirm how the purchase price is determined.
• Discussing the estimated coverage with your attorney, CPA, and insurance professional.
• Requesting updated business valuation input if the last formal valuation is outdated.
• Coordinating coverage amounts so that all owners are treated consistently.

This information is for educational purposes only and does not constitute legal, tax, or insurance advice. Work with qualified professionals to design and implement a buy-sell arrangement that fits your specific situation.