Glossary

Entity-redemption agreement

A buy-sell arrangement in which the business itself owns life insurance on each owner and uses the payout to buy back a deceased owner's share.

Also called: stock redemption agreement, entity purchase agreement, redemption buy-sell

An entity-redemption agreement is a buy-sell agreement in which the company, rather than the individual owners, agrees to buy back an owner's interest at death or another triggering event. The business buys one life insurance policy on each owner, pays the premiums and is the beneficiary; when an owner dies, it uses the proceeds to redeem the shares from the estate. Corporations call it a stock redemption; partnerships and LLCs, an entity purchase.

Its main advantage is simplicity: one policy per owner, with premiums paid by the business. Hypothetical example: a company with four owners holds four policies, rather than the 12 a cross-purchase agreement would need. The drawbacks are mostly tax-related. Surviving owners get no increase in their cost basis, because the company, not they, bought the shares, and the policies' cash values can be reached by the company's creditors.

The Supreme Court's 2024 decision in Connelly v. United States added another consideration. The Court held that life insurance proceeds a corporation receives to redeem a deceased owner's shares increase the company's value for federal estate tax purposes, and the obligation to redeem the shares does not offset them. That can raise the estate tax on the deceased owner's stake. Owners should revisit existing plans with an attorney; see cross-purchase vs entity-redemption buy-sell plans and funding a buy-sell agreement with life insurance.

Last reviewed October 4, 2026

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Related terms

Buy-sell agreement A contract among business owners that sets who buys a departing or deceased owner's share and at what price, often funded with life insurance. Cross-purchase agreement A buy-sell arrangement in which each business owner buys and owns life insurance on the others and uses the payout to buy a deceased owner's share. Key person insurance A policy a business buys on an owner or essential employee, naming itself beneficiary, to cover losses and replacement costs if that person dies. Estate tax A federal tax on the transfer of a deceased person's assets above an exemption amount, with a top rate of 40%; some states levy their own. Cost basis For life insurance and annuities, the after-tax money put in (premiums minus tax-free amounts taken out), which sets how much of a payout is taxed.

Related guides

Funding a buy-sell agreement with life insurance How life insurance funds a buy-sell agreement when a co-owner dies: setting the price, sizing and owning the policies, the tax rules, and the Connelly decision. Cross-purchase vs entity-redemption buy-sell plans Compare cross-purchase and entity-redemption buy-sell plans on policies, cost, basis step-up, creditors and estate tax, including the 2024 Connelly ruling. Life insurance for small business owners The four jobs life insurance does for a small business owner: protect family income, fund a buy-sell, cover a key person and back loans. How each works. The transfer-for-value rule Selling a life insurance policy can make most of its death benefit taxable under IRC §101(a)(2). What counts as a transfer, the exceptions and the traps.