top of page

Buy-sell arrangements and installment sales

Client profile

• Client owns a profitable firm, built up over decades of work

• Desires to install a succession plan to smooth the ownership transition to his son

• He would like to keep working in the business as long as health allows


• Client is male, age 68

• Non-Smoker, rated 200%

• His business was recently valued at $5.5 million

• He wants the business to last for multiple generations

Case in point

We recently had an interesting case about a family exploring succession planning options where the business would go from father to son. Gifting the business to the son was not an option, since Mom would need liquidity to maintain her lifestyle. They also did not want to use outside buyout financing as a strategy, because they did not want to have business assets used as collateral. The two remaining options included buying life insurance on the father or an installment sale. The obstacle came from the father’s underwriting status as substandard and rated 200%. The premiums needed to use life insurance in a buy-sell arrangement were thought to be too prohibitive. What would be the most effective way to keep everyone happy?

Designing a case

Our team dug in and compared the numbers

  • A full-pay premium on a protection IUL policy would cost $232,727 annually for a $5.5 million of death benefit, which would provide liquidity for the business succession at death.*

  • A $5.5 million installment sale, with a twenty-year term and using the September 2020 long-term AFR of 1.0%, would result in an amortization payment of $304,784 annually.

  • By year fifteen, the cumulative life insurance premiums would be $3,490,905, whereas the installment payments would be $4,571,760.

Why it works

Ultimately the clients decided on purchasing a life insurance policy because:

  • The tax-free death benefit will provide a balloon payment to settle the buy-sell at death

  • A buy-sell using life insurance would alleviate Mom’s liquidity concerns

  • The premium commitment is less than the installment payments over life expectancy


Succession planning is critical to ensuring a business owner’s value is protected. A buy-sell arrangement implemented with life insurance can provide needed liquidity at death and helps secure an orderly transition without family discord.



* Solved for full pay $5.5 million DB using Core Capped Index Account with an illustrated rate of 5.67%

This is a supplemental illustration. Not all benefits and values are guaranteed. The assumptions on which the non-guaranteed elements are based are subject to change by the insurer. Actual results may be more or less favorable.

This material does not constitute tax, legal, investment, or accounting advice and is not intended for use by a taxpayer for the purposes of avoiding any IRS penalty. Comments on taxation are based on tax law current as of the time we produced the material.

Life insurance death benefit proceeds are generally excludable from the beneficiary’s gross income for income tax purposes. There are few exceptions such as when a life insurance policy has been transferred for valuable consideration.

Insurance policies and/or associated riders and features may not be available in all states.

Loans and withdrawals will reduce the death benefit, cash surrender value, and may cause the policy to lapse. Lapse or surrender of a policy with a loan may cause the recognition of taxable income. Policies classified as modified endowment contracts may be subject to tax when a loan or withdrawal is made. A federal tax penalty of 10% may also apply if the loan or withdrawal is taken prior to age 59 1/2.



Commenting has been turned off.
bottom of page