A Small Business Uses Insurance for a Buy-Sell Agreement

This is an illustrative scenario based on situations we commonly see. The names and details are fictional and are not based on any actual client. We’ve built it to show how two co-owners of a small Ottawa business turn a handshake understanding into a funded buy-sell agreement, what the ownership choices look like, and roughly what the insurance costs.

The short version: Danielle (44) and Peter (52) own a mechanical contracting company in Nepean worth about $1.6 million. They had agreed verbally that if one died, the other would “buy out the family,” but neither had $800,000 sitting around. Corporate-owned 20-year term policies of $800,000 on each of them came to an indicative $190–$290 a month combined, and the cost is now part of the company’s overhead.

If you co-own a business with anyone other than your spouse, this is for you.

The business and the partners

Danielle and Peter met on a job site fifteen years ago and started their plumbing and HVAC company in a rented bay in Nepean. Today they have eleven employees, a fleet of six vans, and a mix of residential service work and commercial contracts around Ottawa. They own the shares 50/50 through a holding structure their accountant set up years ago.

Their accountant valued the business at roughly $1.6 million using a multiple of normalized earnings. Each half is worth about $800,000, on paper. In practice, a half-share of a small contracting company with no agreement in place is worth much less to an outside buyer, which was the whole problem.

Both are healthy non-smokers. Danielle’s spouse is a nurse; Peter’s spouse works part-time in their office. Peter plans to sell his half to Danielle around age 60 and retire.

The trigger for the conversation was a competitor across town. One of its two owners died suddenly, his widow inherited half the company, and within eighteen months the business was sold for parts. Peter’s wife asked him what would happen to her if the same thing happened to him. He didn’t have a good answer.

The problem nobody had written down

We asked them to walk through three scenarios.

Peter dies. His shares pass to his estate and then to his wife. Danielle now has a business partner who works the front desk and has no interest in running a contracting company. She wants to buy the shares; the estate wants $800,000. Danielle has about $60,000 in personal savings and the bank is unlikely to lend her that amount against a company that just lost half its leadership and possibly some of its commercial relationships.

Danielle dies. Same picture in reverse, except Peter is 52 and can’t take on a large loan he’d be repaying into his late sixties.

One of them has a stroke and can’t return to work. Statistically the more likely event before 65. There is no death benefit, the disabled partner still owns half the company and still expects to be paid, and the healthy partner is doing two jobs.

The written agreement was the lawyer’s job. Our job was to make sure the money would be there when the agreement said it had to be.

Four ways to fund a buyout

We put the funding options side by side.

Funding method	How it works	Problems in practice
Cash reserves	The company or surviving partner keeps $800,000 set aside	Ties up capital the business needs; takes years to build; earnings are taxed along the way
Bank loan	Surviving partner borrows to buy the shares	Lenders are cautious right after an owner dies; repayments come from after-tax income for years
Instalments from profits	Estate is paid over 5–10 years from company earnings	The family waits years for their money; the business carries the debt; a downturn puts everyone at risk
Life insurance	A policy on each owner pays the buyout amount at death	Premiums are an ongoing cost; needs to be sized to the valuation and reviewed

Insurance won because it delivers the full amount at the exact moment the obligation arises, for a monthly premium that is a rounding error against $800,000. The other three methods either require the money to exist already or force the surviving partner and the family into a long, tense repayment arrangement.

For the disability scenario, we discussed a disability buy-out policy, which pays a lump sum or instalments to fund the purchase of a disabled owner’s shares after a long elimination period, often 12 to 24 months. Their lawyer also drafted a clause covering what happens if a partner can’t work. They chose to add the disability buy-out policy at the next annual review rather than all at once, mainly for budget reasons. Our guide to disability insurance for business owners explains the difference between this and personal income protection.

Who should own the policies?

This is where the accountant and the lawyer came in, and where we made sure the insurance matched their plan rather than the other way around. The two common structures:

	Criss-cross (personal ownership)	Corporate ownership
Who owns and pays	Each partner personally owns a policy on the other	The corporation owns and pays for both policies
Who receives the death benefit	The surviving partner, personally and generally tax-free	The corporation, generally tax-free
How the estate is paid	Survivor buys the shares from the estate with the proceeds	Depends on the agreement: the corporation may redeem the shares, or fund the survivor’s purchase, or a hybrid
Tax mechanics	Simple; no corporate accounts involved	Death benefit above the policy’s adjusted cost basis generally credits the capital dividend account, from which capital dividends can generally be paid tax-free
Premium fairness	Danielle pays for Peter’s policy (more expensive, he’s older) from her after-tax income; Peter pays for hers	Company pays both, so the age difference is shared
Premiums deductible?	Generally no	Generally no

With an eight-year age gap, the criss-cross arrangement would have had Danielle paying roughly twice what Peter paid, out of personal after-tax dollars, to insure his life. Corporate ownership spread the cost evenly and, per their accountant, worked cleanly with the capital dividend account. Their lawyer drafted the agreement around a corporate structure.

We’re careful here: the choice between these structures, and the mechanics of the capital dividend account, is accounting and legal advice. We describe the options; the professionals decide. Our article on life insurance for business owners covers the general landscape.

The recommendation and indicative cost

We placed $800,000 of 20-year term life insurance on each partner, owned and paid for by the corporation.

Why 20 years rather than 10 or permanent: Peter plans to exit around 60, which is eight years away, so a 10-year term would have been enough for his policy on paper. But plans slip, and a 20-year term on Peter’s life priced at 52 is far cheaper than re-applying at 62. Danielle’s 20-year term takes her to 64, which covers the period in which she’d likely own the whole company and might use the policy for a key-person or estate purpose instead. Both policies are convertible to permanent coverage without new medical evidence up to the insurer’s age limit, which gives them an exit if the company becomes an estate-planning asset later. Our comparison of 10 vs. 20 vs. 30-year term covers the trade-offs.

All figures are indicative monthly premiums for healthy non-smokers in this illustrative scenario. Actual rates depend on age, health, insurer and underwriting, and these are not quotes.

Coverage	Danielle (44)	Peter (52)
$800,000 term life, 20-year term, corporate-owned	~$60–$90/month	~$130–$200/month
Indicative combined	~$190–$290/month

Against a $1.6 million business, that’s a small line item. For context on how premiums move with age, see our guide to life insurance rates at age 45 and at age 50.

Underwriting was routine. Peter had a paramedical exam because of the amount and his age; his blood work came back clean and he was approved at standard rates. Danielle was approved after a phone interview. Both policies list the corporation as owner and beneficiary, and the buy-sell agreement references them by policy number.

What happened at the first annual review

A year later the accountant updated the valuation to about $1.9 million on the strength of a new commercial maintenance contract. The agreement’s valuation clause moved with it; the insurance didn’t. Each half was now worth roughly $950,000 against $800,000 of coverage.

We added a $150,000 20-year term policy on each partner rather than replacing the originals, since the existing policies were priced at last year’s age. Two policies on one life are perfectly normal; see can you have multiple life insurance policies.

They also added the disability buy-out coverage they’d deferred, after a supplier’s owner had a heart attack at 49 and spent a year out. The company now reviews the valuation, the agreement and the insurance together every spring, with the accountant, lawyer and us on one call.

Lessons you can apply

An unfunded agreement is a wish. The lawyer can write “the survivor shall purchase the shares for $800,000,” but if the survivor doesn’t have $800,000, the family waits and the business suffers.

Size the insurance to the valuation clause, and review both together. A growing business outgrows its coverage quickly. Top up with a new policy rather than replacing an older, cheaper one.

Ownership structure matters more than the product. The same term policy behaves differently depending on who owns it. Get the accountant and lawyer involved before the application, not after.

Disability is the more likely trigger. A death benefit does nothing if your partner is alive but unable to work. Put disability, and possibly critical illness insurance, in the same plan.

Term is usually the right starting point. It’s cheap, it matches the years the partnership will exist, and convertibility keeps permanent coverage available if the business or the estate needs it later.

How Hayes can help

If you and a partner own a business and your buy-sell plan lives on a handshake, we can help you put a number on it and fund it. We’ll work alongside your accountant and lawyer, compare 30+ Canadian insurers for the coverage the agreement needs, and keep the policies aligned with the valuation year over year. Kevin Hayes has advised Ottawa business owners since founding the brokerage in 1996, and our advice costs you nothing because the insurers pay us.

Compare quotes from 30+ Canadian insurers in about two minutes, free and with no obligation. Or contact us to book a call with your partner and your accountant on the line.