How Does Life Insurance Support a Closely Held Business?
Life insurance supports a closely held business by supplying cash at the moments the business is most exposed: when an owner dies, when a key person is lost, when a buyer must be paid, and when leaders need a reason to stay. The Infinite Wealth Group is an independent life insurance agency in Chattanooga, Tennessee. We design and place the coverage. Your attorney drafts the buy-sell and other agreements, and your CPA confirms the tax treatment. This hub explains the main tools and links to the detail pages for each.
Buy-Sell Agreements
Cross-purchase or entity redemption: the agreement sets the buyer and the price, and life insurance supplies the cash.
Key Person Coverage
Company-owned coverage on the people whose loss would hurt revenue, credit, or enterprise value.
Executive Bonus and Split-Dollar
Section 162 bonus plans and split-dollar arrangements that help retain the leaders a buyer or successor will want.
Exit and Succession
A funded plan for the day ownership changes hands, whether by sale, family succession, or death.
Buy-Sell Agreements: Cross-Purchase vs. Entity Redemption
A buy-sell agreement is a contract that says who will buy an owner's interest, what events trigger the purchase, and how the price is set. Life insurance is the usual way to fund it, so the buyer has cash when the trigger happens.
The two main structures differ in who owns the policies. In a cross-purchase agreement, each owner holds a policy on each of the others and buys the departing or deceased owner's interest personally. In an entity redemption agreement, the company owns the policies and uses the proceeds to redeem the owner's shares. Cross-purchase can mean many policies when there are several owners. Entity redemption is simpler to administer. A hybrid or wait-and-see agreement lets the choice be made when the event occurs.
In Connelly v. United States, decided in 2024, the Supreme Court held that life insurance proceeds a company receives to redeem a deceased owner's shares can increase the company's value for federal estate tax purposes, and that the company's obligation to redeem the shares does not offset them. In general terms, an entity redemption plan funded with company-owned life insurance can raise the value of the deceased owner's stake in the estate. Many owners and their attorneys now revisit existing agreements. Your attorney chooses the structure. We design the policies to match it.
Key Person Coverage
Key person insurance is a policy the business owns on an owner or employee whose death would materially reduce revenue, credit access, or enterprise value. The company pays the premiums, is the beneficiary, and uses the proceeds to cover lost profit, recruit and train a replacement, and reassure lenders and customers.
Premiums are generally not deductible when the business is the beneficiary, and the death benefit is generally income-tax-free, subject to the employer-owned life insurance notice and consent rules in IRC §101. Those requirements must be met before the policy is issued, so we build them into every business-owned application. Your CPA confirms the treatment for your company.
Section 162 Executive Bonus Plans
A Section 162 executive bonus plan is an arrangement in which the business pays a bonus to a selected executive, who uses it to fund a permanent life insurance policy the executive owns. The bonus is generally deductible to the business as compensation under IRC §162 and taxable to the executive, so many plans add a second bonus to help cover the tax.
The appeal is retention. A restricted endorsement or similar mechanism can limit access to the cash value until the executive has stayed for a set period. The executive receives a real asset, and the company avoids the filings that come with a qualified plan. Your CPA confirms deductibility and reasonable compensation, and your attorney reviews the documents.
Split-Dollar Basics
Split-dollar is an arrangement in which two parties, often an employer and an executive or a trust, share the cost and benefits of a life insurance policy. How it is taxed depends on how it is structured. The federal rules are in Treas. Reg. §1.61-22, which treats certain arrangements under an economic benefit regime and others under a loan regime.
Split-dollar can be used for executive benefits and also in estate planning, where it may be paired with an irrevocable trust and, in some cases, with premium finance. These arrangements are technical and document-heavy. Use them only with an attorney and CPA who have reviewed the specific design, and expect the tax treatment to depend on the details.
Exit and Succession Planning
Exit planning is the work of deciding how and when ownership will move on, and then funding it. Whether the exit is a sale to a partner or outside buyer, a transfer to a family member, or the result of an owner's death, the plan has to answer who buys, at what price, with what money, and what the family receives.
Life insurance helps in several ways: it funds the buyout at death, it can protect the family if an owner dies before a sale closes, and permanent coverage builds cash value that can be borrowed against. For family businesses, an irrevocable trust can own a policy that equalizes inheritances for the children who are not in the business. See our estate planning page for how that works, and our business protection page for the detailed service description.
We suggest starting well before a planned exit. Valuation, ownership cleanup, and insurability all take time, and a buyer or successor looks hard at all three.
Chattanooga and East Tennessee Business Owners
We are based in Chattanooga and work with owners across Hamilton County and East Tennessee. Tennessee has no state estate or inheritance tax, but federal estate tax can still affect a business owner's estate, which is why the buy-sell and the estate plan should be built together. Our Chattanooga page covers the local context and the federal figures.
Why Business Owners Work With The Infinite Wealth Group
- ✓Independent agency with access to many insurers, so coverage is chosen for the agreement rather than the reverse.
- ✓Buy-sell policies designed with Connelly in mind, in coordination with your attorney.
- ✓Employer-owned policy notice and consent built into the application before it is submitted.
- ✓Insurance-only: your attorney drafts the agreements and your CPA confirms the taxes.
- ✓Based in Chattanooga and serving Hamilton County and East Tennessee.
Frequently Asked Questions
What is the difference between cross-purchase and entity redemption?
In a cross-purchase agreement the owners buy each other's interests and own the policies on one another. In an entity redemption agreement the company owns the policies and buys back the shares. Cross-purchase can require many policies with several owners. Entity redemption is simpler but is affected by the Connelly decision. Your attorney chooses the structure.
What did the Connelly decision change?
In 2024 the Supreme Court held that life insurance proceeds a company receives to redeem a deceased owner's shares can increase the company's value for estate tax purposes, and the redemption obligation does not offset them. Entity redemption plans funded with company-owned insurance can therefore raise the value of the deceased owner's stake. Ask your attorney to review any existing agreement.
What is key person insurance?
It is a life insurance policy owned by the business on a person whose loss would hurt revenue, credit, or value. The business pays the premiums and receives the proceeds, which can cover lost profit and the cost of finding a replacement. Employer-owned policies have notice and consent requirements under IRC §101 that must be met before issue.
What is a Section 162 executive bonus plan?
The business pays a bonus to a selected executive, who uses it to fund a permanent policy the executive owns. The bonus is generally deductible to the company under IRC §162 and taxable to the executive. A restricted endorsement can add a retention period. Your CPA confirms the tax treatment and your attorney reviews the documents.
What is split-dollar life insurance?
It is an arrangement in which two parties share the cost and benefits of a life insurance policy, such as an employer and an executive or a trust. Federal tax treatment depends on the structure and is governed by Treas. Reg. §1.61-22, which sets economic benefit and loan regimes. Use it only with an attorney and CPA who have reviewed the design.
When should a business owner start exit planning?
Early, because valuation, ownership cleanup, and insurability take time and a buyer or successor will examine each. A funded buy-sell and key person coverage protect the business and family along the way. The right timeline depends on the business and the owner, and your attorney and CPA should help set it.
Does Tennessee tax business owners' estates?
Tennessee has no inheritance tax for deaths after December 31, 2015, and no state estate tax. Federal estate tax can still apply to estates above the federal exclusion, and a business can make up much of an estate's value. Confirm how these rules apply to you with your estate attorney and CPA.
Do you draft the buy-sell agreement?
No. The Infinite Wealth Group is an insurance agency. Your attorney drafts the agreement and your CPA confirms the tax treatment. We design and place the insurance that funds it, coordinate with your attorney and CPA on ownership and beneficiary designations, and review the coverage as the business changes.
Sources and further reading
- Connelly v. United States, No. 23-146 (2024): Legal Information Institute
- Treas. Reg. §1.61-22: Taxation of split-dollar life insurance arrangements (eCFR)
- 26 U.S.C. §101: Certain death benefits (Cornell LII)
- 26 U.S.C. §162: Trade or business expenses (Cornell LII)
- Tennessee Department of Revenue: Inheritance Tax
Reviewed by Brandt Hudson, licensed insurance professional. Last verified October 20, 2026. This page is educational and describes insurance products and general tax rules; it is not tax, legal, or investment advice. Confirm your situation with your CPA or attorney.