How do I get life insurance on my business partner?

Yes — you can buy Life Insurance on a business partner, and it is one of the smartest moves two co-owners can make to protect what they have built together. What makes it legal is a principle called insurable interest: because your partner's death would cause you, and the business, a genuine financial loss, the law recognizes that you have a legitimate reason to insure their life. The one thing you cannot do is set it up behind their back. Your partner has to know about the coverage, consent to it in writing, and personally complete the insurance company's application and health review. After that, the important decisions are who owns the policy, who receives the death benefit, and how much coverage to carry — and the right answers depend on why you are insuring them in the first place.

Insurable interest and consent: the two rules that let you do this

Two conditions have to be met before any insurer will put a policy on another person. First, you need an insurable interest in that person — a real financial stake in their continued life. Business co-owners clear this bar easily: if your partner dies, you could lose their skills, their client relationships, their share of the revenue, and potentially control of the company if their ownership stake passes to a spouse or heirs. Second, the person being insured must consent. Life Insurance is not something you can quietly take out on someone; your partner signs the application as the proposed insured and acknowledges the coverage.

Practically, that means your partner (the insured) completes a health questionnaire, usually answers financial questions that justify the coverage amount, and often sits for a short paramedical exam. The insurer then assigns a rate class based on their age and health. You, or your business, are listed as the owner and beneficiary depending on the structure you choose below. Because the amount has to be financially justified, the insurer will want to understand the value of the business and each owner's share — which is exactly the conversation you should be having anyway.

First, decide WHY you are insuring your partner

There are two distinct reasons to put a policy on a co-owner, and they lead to different structures. Many partnerships end up carrying both.

• To fund a buyout (buy-sell). If your partner dies, their ownership share does not simply disappear — it typically passes to their family. Without a plan, you can suddenly find yourself in business with a grieving spouse who wants to be cashed out, or who wants a say in operations. Life Insurance funds the buyout: the death benefit gives the surviving owner or owners the cash to purchase the deceased partner's interest at a fair, pre-agreed price, so the family gets liquidity and you keep clean control. This is the job of a buy-sell agreement funded with Life Insurance.
• To cushion the business (key person). Some partners are also the rainmaker, the lead technician, or the relationship that half the revenue depends on. If that person dies, the company can lose income, scramble to recruit and train a replacement, and reassure nervous lenders and clients. A policy owned by the business to soften that blow is key person (key man) insurance.

Buy-sell coverage answers “who buys the shares, and with what money?” Key person coverage answers “how does the business survive the disruption?” They are not one policy doing two jobs, and it is common for co-owners to carry a layer of each.

The step-by-step: how to actually put a partner policy in place

1. Agree on the purpose and the dollar amount. Decide whether you are funding a buyout, protecting against lost value, or both, and settle on a coverage figure (see sizing below).
2. Put the deal in writing. If the goal is a buyout, sign a buy-sell agreement that legally obligates each owner (or the company) to buy and sell at a set valuation. The policy funds the promise; the agreement is the promise.
3. Choose who owns the policy. Cross-purchase, entity-owned, or a special-purpose LLC — explained in the next section. This choice drives the tax result, so make it deliberately.
4. Have each insured partner apply and consent. Every co-owner being insured completes their own application, health underwriting, and written consent. If the business will own the policy, there are extra written notice-and-consent steps that must happen before the policy is issued (more on that below).
5. Fund it with the right kind of coverage. Term or permanent — matched to how long the obligation lasts.
6. Review it as the business grows. A valuation that was right at $800,000 is wrong once the company is worth $3 million. Revisit the coverage and the buy-sell price every couple of years.

Who should own the policy? Cross-purchase vs. entity-owned

This is the decision people get wrong most often, and it matters because it changes both the tax outcome and how many policies you need.

• Cross-purchase. Each owner personally owns and pays for a policy on each other owner, and personally buys the deceased owner's interest. The advantages are meaningful: the surviving owner gets a step-up in cost basis in the shares they buy, and the death benefit never touches the company's books. The drawback is math — with more than two owners the policy count multiplies quickly, because n owners need n × (n − 1) policies. For a clean two-partner business, cross-purchase is often the simplest and most tax-efficient answer: two people, two policies.
• Entity purchase (redemption). The company owns one policy per owner and uses the proceeds to redeem the deceased owner's shares. It is administratively tidy — one policy per owner, one payer — but it carries a serious estate-tax wrinkle after the Connelly decision (below), and the surviving owners get no basis step-up.
• Special-purpose insurance LLC. A separate, partnership-taxed LLC owns the policies. It keeps the proceeds off the operating company's balance sheet, can deliver a cross-purchase-style basis step-up, and fits inside the partner and partnership tax exceptions — while solving the “too many policies” problem for businesses with several owners. It is more setup work and belongs in a conversation with your attorney and agent together.

The Connelly warning every redemption setup needs to hear

In Connelly v. United States (decided June 6, 2024, a unanimous U.S. Supreme Court opinion by Justice Thomas), the Court held that a company's obligation to redeem a deceased shareholder's shares is not a liability that lowers the company's value for federal estate-tax purposes. Instead, the corporate-owned Life Insurance proceeds set aside for the buyout count as a company asset that increases its fair market value — with no offset for the redemption obligation. In plain terms: an entity-owned policy can inflate the taxable value of the deceased owner's estate. Notably, the Court itself pointed out that the owners “could have used a cross-purchase agreement” to avoid the problem.

For most small partnerships this will not trigger an actual estate-tax bill — the 2026 federal estate-tax exemption is $15 million per person (roughly $30 million for a married couple using portability). But if your business value plus insurance proceeds approaches those numbers, the structure choice is not academic. Any existing redemption agreement funded with company-owned coverage deserves a review, because the same valuation logic can also distort the buyout price. If you are leaning toward a business-owned structure, read up on corporate-owned life insurance (COLI) and the rules that come with it — when the company owns a policy on an owner or employee, written notice and consent must be completed before the policy is issued, and the business files Form 8925 with its annual tax return.

Term or permanent: how partners fund the coverage

The policy that funds a partner buyout can be term or permanent, and the right pick follows the shape of the obligation.

• Term Life Insurance is the low-cost choice when the buyout need has a defined horizon — for example, two partners who plan to sell or wind down within the next 10 to 20 years. It supports large death benefits for a modest premium, with no cash value.
• Permanent Life Insurance (whole life or universal life) fits when the obligation is effectively lifelong, when you want the option to fund a living buyout at retirement, or when the cash value is useful on the business's balance sheet. Permanent coverage costs substantially more than comparable term, so it suits established partners with stable cash flow rather than a brand-new venture on a tight budget.

Plenty of partnerships blend the two: a large term policy for the bulk of the buyout obligation while the business is growing, plus a smaller permanent policy that will still be there for a later retirement buyout.

How much Life Insurance should you put on a partner?

The amount depends on the purpose.

• For a buyout, insure the value of the ownership interest. If the business is worth $2 million and you each own half, a policy funding a full buyout of one partner points toward roughly $1 million — which is why an honest, current valuation is step one.
• For key person protection, common approaches include a multiple of the partner's compensation (often in the range of 5 to 10 times), the profit the person contributes over the years it would take to recover it, or the hard cost to recruit and train a replacement.

If you are also thinking about your own personal coverage — income replacement for your family, not just the business — that is a separate and equally important layer. See what kind of Life Insurance small business owners need for how the personal and business pieces fit together.

Three tax facts North Carolina partners should know

Educational only — confirm the specifics with your CPA or attorney before you act.

• The premiums are generally not tax-deductible. When you or your business are the beneficiary of a policy, the tax code does not let you deduct the premiums. Do not build a plan around a write-off that is not there.
• The death benefit is generally income-tax-free. Paid to the surviving owner or the business, the proceeds are usually received income-tax-free — which is the whole point of pre-funding a buyout with Life Insurance rather than scrambling for cash or a loan.
• Be careful about transferring an existing policy. The tax code's “transfer-for-value” rule can make part of a death benefit taxable if a policy is sold or transferred for consideration — but there are important exceptions, including transfers to the insured, to a partner of the insured, or to a partnership in which the insured is a partner. This is exactly why moving policies between owners should never be a casual, do-it-yourself step.

If the numbers are large, or you want a more efficient way to reward and retain key people, there are advanced tools worth exploring with an advisor, such as a split-dollar arrangement or an executive bonus plan. Those belong in a planning conversation, not a spur-of-the-moment purchase.

What this looks like in North Carolina

North Carolina has no state estate tax (it was repealed in 2013) and no inheritance tax, so only the federal estate tax is in play for NC business owners — another reason the Connelly valuation issue only bites the largest estates. What matters far more for a typical Charlotte-area partnership is getting the structure and the paperwork right: a current valuation, a signed buy-sell agreement, the correct owner and beneficiary on each policy, and coverage amounts that actually match what the business is worth.

This is where working with an independent agent pays off. An independent agency is appointed with multiple insurance carriers, so it can compare underwriting and pricing across companies rather than being limited to one insurer's rates — and because agent commissions are already built into a carrier's filed premium, using an independent agent does not cost you more than buying direct. You can verify any agent's license for free through the North Carolina Department of Insurance producer lookup before you sign anything.

Common mistakes partners make

• Buying the policy but skipping the agreement. A death benefit with no buy-sell agreement leaves everyone guessing about price and obligation at the worst possible moment.
• Defaulting to an entity-owned redemption without weighing Connelly. Simpler is not always better once estate valuation is on the table.
• Insuring the wrong amount. Coverage set years ago rarely matches today's business value.
• Letting the business own a policy on an owner without the required notice and consent completed before the policy is issued. Miss that step and a chunk of the death benefit can become taxable to the company.
• Naming the wrong beneficiary. In a cross-purchase, the surviving owner — not the business — should be the beneficiary. A mismatch here quietly breaks the whole plan.

Talk it through with The Jordan Insurance Agency

Insuring a business partner is simple in concept and easy to get wrong in the details. The Jordan Insurance Agency is an independent insurance agency based in Charlotte, North Carolina that works with multiple carriers, which means we can compare options for you and match the ownership structure, coverage amount, and policy type to how your partnership is actually built. We will help you coordinate with your attorney and CPA on the buy-sell agreement and the tax structure, and we will shop the coverage across insurers so your partner is insured at the best available rate. There is no charge to have the conversation. Reach out to The Jordan Insurance Agency and we will help you protect the business you and your partner have built.