Buy-Sell Life Insurance in Canada: Who Owns the Policy and How Much to Buy

Let’s just pause and look at what happens. If something happens to you, what happens to the company? Is there family? Are there shareholders, employees, a bank? Is there something in place to deal with that? For a company with two or more owners, the honest answer is usually a shareholder agreement nobody has opened in years and a policy that may or may not still match it.

This page covers the part the lawyer’s document leaves to you: which entity should own the policy, how insurers size and underwrite it, what the tax treatment actually is, and what to do with the coverage when a partner leaves, the company sells, or a partner is alive but cannot work.

Ownership and tax treatment depend on your corporate structure. Confirm with your CPA and have a lawyer draft or review the agreement.

On this page

• What a buy-sell agreement does, and what the insurance does
• Is buy-sell insurance the same as key person insurance?
• Who should own the policy and who is the beneficiary
• How much buy-sell insurance each partner needs
• What insurers ask for on a buy-sell application
• Cross-purchase, corporate redemption, hybrid and promissory note
• Term or permanent life insurance for a buy-sell
• Tax treatment: premiums, the capital dividend account and the beneficiary
• When a partner leaves, the company sells or a partner is disabled
• Bank-required coverage is not buy-sell coverage
• Frequently asked questions

What a Buy-Sell Agreement Does, and What the Insurance Does

A buy-sell agreement is a legally binding contract between the owners of a business that sets what happens to an owner’s shares when that owner dies, becomes disabled or leaves: who must buy them, at what price, and how the buyer pays. Life insurance funds one of those triggers, death, by putting cash in front of whoever the agreement obliges to buy. It does nothing about the other triggers, and on its own it decides nothing.

The real risk is having a signed agreement that gives everyone a false sense of confidence. The agreement says insurance should fund the buyout, but it doesn’t explain enough about how. So the question I want answered before any application goes in is this: if this shareholder died tonight, who would be legally required to buy the shares, and where would the insurance cheque go?

Both answers exist somewhere. They are just often sitting in two different documents that were never lined up.

Clients ask me whether the agreement has to be in place before the policy is bought. No, it doesn’t. But if that agreement is not in place, then frankly that money is going to go into the corp and stay there. The policy can come first. The agreement is what turns a corporate death benefit into a funded share purchase.

Five things the agreement has to spell out, not just imply

How a signed agreement drifts

I can’t say I have personally seen a buy-sell death claim. What I see constantly is the version above: an agreement signed years ago when the business was worth $2 million, a company now worth $6 million, one partner insured and the other not, or ownership and beneficiary that no longer match what the agreement says. That is why it is imperative to review these things often, at least every time the valuation moves.

A broker who works with incorporated business owners will sit the policy next to the agreement and run that check with you. Most lawyers will not, because the policy is not their document. The rest of this page is that check, in order: who owns it, how much, what the insurer will ask for, and what to do when the partnership changes.

Is Buy-Sell Insurance the Same as Key Person Insurance?

Buy-sell insurance and key person insurance generally use the same underlying product, life insurance on one person, for two different purposes. Buy-sell money buys a deceased owner’s shares from their estate. Key person money replaces the revenue and the person. Key person coverage is usually corporate-owned; who owns buy-sell coverage depends on whether the arrangement is a corporate redemption, a cross-purchase or another structure. One policy cannot do both jobs with the same dollar, so many companies with active owner-operators have both needs.

I get this question from every co-founder who has searched “business insurance” and found nothing but personal policies. Key person or buy-sell insurance is the same product, but could be used for a different purpose. Key person helps the business by providing a lump sum in the case of death of a key individual. Buy-sell provides a lump sum to buy that person’s share of the business from their estate. The insurer underwrites the life the same way either way; what changes with the purpose is the financial justification, because key person is measured against the person’s compensation and buy-sell against the share value. On your end, you define the purpose, and then the paperwork has to match it.

Where it goes wrong is the assumption that one policy will do both. A founder told me on a call that the one policy would cover the key man and the buy-sell all at the same time. It will not. If $500,000 goes to the estate for the shares, that $500,000 is not available to replace the person. I would still structure it as two separate policies so it is clearly defined what we’re doing, even at the same carrier on the same life.

About the premiums on this page: every figure is a historical quote from a real, de-identified file, quoted in the year stated, based on carrier rates at that time, illustrative only, and subject to underwriting and change. They are not offers, no province, city or region is implied, and a reader with the same age and amount may be quoted more or less. Your premium depends on age, sex, smoking status, health, amount, term length and the insurer’s current rates.

The full mechanics of the key person side, including how insurers check that a key employee actually is one, are in the separate guide to key person insurance in Canada. The rest of this page stays on the buy-sell side.

Who Should Own the Buy-Sell Policy and Who Is the Beneficiary

For an incorporated business using the corporate redemption structure, the corporation is usually the owner, the payor and the beneficiary of each policy, and each shareholder is only the life insured. For a straightforward corporate redemption I generally want those three roles with the corporation. There are legitimate designs where they differ, and cross-purchase arrangements put ownership with the partners instead; both are covered in the structures section below. What creates tax questions and unfunded buyouts is splitting the roles by accident, most often by naming a spouse as beneficiary on a company-paid policy.

Here is how I explain it on every corporate file. Every policy, it doesn’t matter if it’s two or four, those proceeds go to the corp. The corp is the owner of the policy. The corp is the beneficiary of the policy. The corp is the payer of the policy. The proceeds are deposited tax-free into the corp and can be dispersed based on whatever the bylaws are or whatever the conditions of the agreement are. The precise version of that last step: the corporation receives the proceeds, and if the policy creates a capital dividend account credit, the corporation may then pay an elected capital dividend, depending on the structure and the available balance.

When a partner already holds a policy through someone else, I do not just match it. I want to know who owns the other policy, who is the beneficiary, who is the payer, and what it was originally meant to cover. Half the time it is a personal policy with a spouse as beneficiary that everyone assumed would fund the buyout. It will not. The money goes to the spouse, not to whoever is obliged to buy the shares.

Four ways the roles come apart, and what each one costs

Monthly or annual is a real choice on a corporate policy, not just a cash-flow one. Annual pay is often a few percent cheaper. The main benefit of paying monthly is that you can cancel any time and it stops. It also does not require someone to manually go in and pay the premium every year, and sometimes those things get lost. One corporate policy in my files got a notice of unpaid premium a year after it was placed for exactly that reason.

Whichever way it is paid, the beneficiary designation on the policy and the funding mechanics in the agreement have to work together, so the proceeds can reach whoever must fund the purchase: the corporation if it redeems the shares, or the surviving partners if they buy them with a capital dividend behind them. The insurer only reads one of those documents, so the other has to be written to match it.

How Much Buy-Sell Insurance Each Partner Needs

The usual starting point is coverage equal to each partner’s percentage of the company’s fair market value, less any buy-sell coverage already in force on that life. Two equal partners in a company worth $8 million would each carry $4 million. Insurers size buy-sell coverage the same way, so an amount pulled from anywhere else, salary, a round number, whatever the other partner happens to have, will be questioned at underwriting. Agreements can deliberately fund part of the price with cash, debt or instalments; in that case the insurance covers whatever balance the agreement assigns to it, and the agreement has to say so.

The conversation on a call is short. I ask how much of the company you own. A founder told me 54. So you know already you’re at 20, because his company had just raised at about $34 million. The math is not the hard part. The hard part is that the number changes every year and the policy does not.

That last box is what goes on the application, and the four boxes before it are what the cover letter explains. If the business is valued at $8 million and one client owns 50%, that creates an approximate $4 million buy-sell need. If there is already a million in force, we are applying for another $3 million to fill the gap. Laid out that way, it prevents a lot of unnecessary underwriting questions and it expedites the file.

Three real files, de-identified

The third file is what the next section is about. The formula sets the goal. Financial underwriting, the cap table and the insurer’s reinsurers decide what you can actually buy.

Growth is the part most agreements ignore. The founders in the first file wrote to me that one million would do it for now, maybe in five years it should be more, and they would see what things looked like by then. That is honest, and it is also how a company worth $2 million at signing ends up worth $6 million with the same $1 million policy. Two ways to handle it, and they are not exclusive.

On price, the sizing number is usually the smaller worry. A healthy 32-year-old woman was quoted about $3,500 a year for $3 million on a 40-year term in 2024, before the lowest carrier came in a little under that, and a $1 million 10-year term on a founder in his thirties ran about $70 a month in 2023. Both are historical quotes, illustrative only. What a 20-year term or a 10-year term costs today by age and amount is on those pages; the term-length choice itself is a few sections down.

What Insurers Ask For on a Buy-Sell Application

A buy-sell application is financially underwritten as well as medically underwritten. The insurer will ask for the company’s fair market value, each applicant’s ownership percentage, the existing coverage on every partner and who owns it, the purpose of the new amount, and, above a threshold that ranges from roughly $3 million to $5 million depending on the carrier, corporate financial statements and a written cover letter. A face amount that cannot be tied to those numbers may be questioned, reduced, or declined.

The biggest mistake I see from a broker standpoint is focusing too much on the medical aspect and not enough on the financial. When there’s business insurance involved there is a financial underwriting component, so simply stating that you’re applying for $3 million of insurance is not enough. It’s my job to find those answers before we apply, so we have the most successful outcome when we do.

What the underwriting desk came back asking, on one real corporate file

Point five is the one that trips a 50/50 partner who calls me because the other partner already has a policy. I would not simply match it. I’d want to see the shareholder agreement, the current business value, the ownership percentages, and the details of the other partner’s insurance: who owns it, who’s the beneficiary, who’s the payer, what it was originally meant to cover. If the two amounts differ, we have to justify why, in writing, before the underwriter asks.

Where the paperwork threshold sits, by carrier, from their published financial underwriting guidelines

Thresholds and forms change with each guideline edition. Treat these as the shape of the ask, and confirm the current requirement with the insurer or your broker before applying.

The cover letter is where a broker who understands this space earns the fee. A regional sales manager at one of the large carriers put it plainly years ago: a good coverage letter describing the business, how long it has operated, revenues and profits over the years, and the purpose of the insurance always goes a long way with underwriters. Mine reads like the sizing box in the previous section, in sentences.

Then there are files where the formula says $18 million and no single insurer will write it. A majority owner of a venture-backed company, 40 and a non-smoker with a complicated history, had been taken to two carriers for $18 million by a bank advisor. Both declined, one after going to its reinsurers. Two more declined after that. The instinct at that point is to try a fifth carrier with the same number.

Each policy is corporate-owned and each amount sat inside the appetite of the carrier that issued it. The plan is to re-approach the market for more in about two years, when the history is older. Not a claim that this outcome is available to anyone else; every file depends on its own evidence.

Two habits made that possible. First, let’s apply for 2 million, not 5 or 10. Once you start applying for 5 million plus, they really scrutinize it. A formal application also creates application activity at the Medical Information Bureau, the industry database insurers check, and underwriting-significant medical information gathered on that application can be reported there. MIB does not record whether a carrier approved, rated or declined you, but the next carrier sees that you applied and will ask what came of it. Second, before any formal application, insurers receive a generalized profile rather than personal identifiers: an anonymous check with the underwriting desk that gathers a real opinion without creating any record. Where a partner already has recent underwriting at a carrier, the reverse shortcut applies: ask that carrier to open the buy-sell amount on the same evidence rather than starting the medicals again.

If you want the sizing done properly before it goes anywhere near an underwriter, get in touch and bring the shareholder agreement with you.

Cross-Purchase, Corporate Redemption, Hybrid and Promissory Note: Which Structure Funds the Buyout

There are four ways to structure the funding of a buy-sell agreement in Canada. In a cross-purchase, also called criss-cross, each owner personally holds a policy on every other owner and buys the shares directly from the estate. In a corporate redemption the corporation owns one policy per shareholder and buys back the deceased’s shares. A hybrid lets either the survivors or the corporation buy. In the promissory note method the corporation owns the policy, the survivors buy the shares with a note, and a capital dividend from the corporation repays it. Corporate ownership is what nearly every incorporated client I work with ends up using; the tax result for the estate differs by method and is a decision for your accountant and lawyer, not your broker.

My frustration is not with which structure a lawyer picks. It is when the agreement says insurance should fund the buyout, however it doesn’t explain enough about how. Who owns the policy. Who is the beneficiary. How the amount is updated as the company grows. What happens if one shareholder is uninsurable. Pick a structure below, then make the agreement say all four things for that structure.

Tax outcomes above are the general shape only. The capital gains exemption, the 1995 stop-loss rules and any grandfathering depend on when the shares and the agreement were put in place. Nothing here is tax or legal advice.

The cross-purchase question I get most is arithmetic: how many policies. Each owner needs one policy on every other owner, so the count is the number of owners times one less than that number.

That is why cross-purchase stops at two or three partners in practice, and why a trust is sometimes used to hold the policies when there are more. It is also why I see corporate ownership on almost every incorporated file: one policy per owner, premiums from corporate dollars, and the death benefit routed through the capital dividend account. Where the business is a family company planning a handover rather than a partner buyout, the same corporate policy often does double duty inside a succession plan, and that is a different conversation.

One more variant comes up on two-partner files: a single joint first-to-die policy instead of two individual ones. You can certainly do one policy which is a joint first-to-die or multi-life, still owned and paid for by the corporation, with a split in beneficiary as the agreement directs. I do it when both partners are healthy. When one partner is a smoker with a prior decline, as on one file where the other partner was clean, we would need to do individual policies, so the healthy partner is not priced on the other one’s history. The trade-offs are in single versus joint life policies; the short version is that a joint policy pays once, then the survivor is uninsured on the buy-sell unless the contract carries a survivor option.

Term or Permanent Life Insurance for a Buy-Sell Agreement

Term life insurance is commonly used to fund buy-sell agreements in Canada, because the obligation usually has a horizon: a planned sale, a retirement date, a partner’s expected exit. The term length should match that horizon. Permanent insurance fits when the partnership is expected to outlast any term you can buy, typically a multi-generation family company, and it costs several times more for the same face amount. Whether the policy is term or permanent does not determine who owns it; ownership follows the buy-sell structure, corporate in a redemption or corporate-funded design, personal in a traditional cross-purchase. The choice of product is reversible in one direction only: most term policies can be converted to permanent later without new medical evidence, but not the other way round.

A life policy is forever and a day, but it costs significantly more. On a venture-backed file I put it to the owner directly: I just don’t think it makes sense at this stage, I would do a cheaper term policy right now, and my hope is that in a couple of years we do something completely different. He answered that in twenty years they wouldn’t even own the business. That settled it. Match the coverage to the actual risk. If the risk disappears after a few years, term is the better fit. If the risk continues for life, do not solve it with coverage that may expire too early.

Term lengths chosen on real files, and why

Permanent earns its place in two situations. A family business that intends to pass to the next generation has a buyout obligation with no end date, and permanent insurance is designed to stay in force for life as long as the required premiums are paid. And where the corporation has retained earnings it does not need, a participating or universal policy builds cash value the company can use for other purposes, with the death benefit still doing the buy-sell job. That second case is a corporate investment decision as much as an insurance one and belongs with your accountant; the product side is on the permanent life insurance page.

Four levers that change the premium before you change the product

Whatever term you pick, read the conversion clause before the deal closes. Most term contracts allow conversion to a permanent policy before a set age or date without new health evidence, at the health rating you had when the term was issued. If the company is still standing when the term ends, and the partner is not as healthy as he was, that clause is the buy-sell.

The one term policy I would not build a buyout on is one that renews at the end. Renewal premiums on a 10-year term jump hard, and a corporation that lets a policy lapse at renewal because the number startled the bookkeeper has an unfunded agreement again.

Buy-Sell Life Insurance Tax Treatment: Premiums, the Capital Dividend Account and the Beneficiary

Premiums on a buy-sell policy are generally not tax deductible to the corporation. The death benefit is generally received tax-free by the corporation, and the amount by which it exceeds the policy’s adjusted cost basis is credited to the corporation’s capital dividend account, from which it can be paid to shareholders as a tax-free capital dividend once the corporation files the election. That credit is the death benefit less the adjusted cost basis, not the full face amount, and it belongs to private corporations only. Every figure below is general information, not tax advice.

The question I get after every corporate application is some version of: and if the company pays the premium, I can claim it through the corporation, right? I put the answer in writing to a client’s accountant years ago and it has not changed. You cannot deduct life insurance premiums for the corporation unless it meets specific criteria related to a bank requiring the policy as collateral for a loan. Key person insurance does not qualify. Neither does buy-sell.

Four questions owners actually ask, answered at the level the Income Tax Act supports

The capital dividend arithmetic on two $1 million policies

Illustrative. The basis on the second policy is a real corporate policy’s figure with the face amount changed to $1 million for comparison. Basis moves every year and can be reduced further by rules that apply to policies transferred into a corporation before March 2016. Your accountant confirms the credit from the insurer’s statement, not from a blog.

What the corporation does with that credit is where the buy-sell structure from the previous section matters. Under a redemption, the capital dividend can be part of the payment to the estate for the shares. Under the promissory note method it goes to the surviving shareholders to repay what they owe the estate. Same credit, different recipient, and the agreement has to say which. The mechanics of the account itself are in the capital dividend account and life insurance.

This section is general information and not tax, legal or accounting advice. Tax treatment depends on your corporation’s circumstances. Confirm with your CPA or tax advisor and have a lawyer draft or review the shareholder agreement. For the personal side, when a death benefit or a policy can become taxable at all, see when life insurance is taxable in Canada.

What Happens to Buy-Sell Insurance When a Partner Leaves, the Company Sells or a Partner Is Disabled

A buy-sell life policy only pays on death. When a partner leaves alive, the company is sold, or a partner is disabled but still living, the policy does nothing on its own and the agreement decides what happens to it: keep it, cancel it, or transfer it. A corporate-owned term policy can be cancelled at any time with no penalty and no refund. It cannot be moved to a different person. And the disability trigger needs a different product entirely, or the agreement is unfunded exactly when the partners are most likely to disagree.

The questions come in the same order on every file. And this is only for death, correct? If either of them left the business, or when we sell, are these open-ended policies so we can cancel them at any time? Yes, for term. Then, from the same client, could we transfer his policy to a different executive? No. That is the one that catches people, so it gets its own row below.

Four exits, and what actually happens to the policy

Now the living-but-not-working case. What happens if I get hit by a bus and I’m not able to do it, but I’m still alive? Two owners asked me that in the same year, and neither agreement answered it. As it relates to disability buy-sell, the products do exist, but it is certainly not a common tool. I find disability is more often owned by shareholders to protect their personal income. There might be things like overhead expense insurance that are more appropriate for the business. Critical illness is popular, and it is definitely something I have seen often, because it lets the company hold a lump sum if someone is critically ill and either seek a replacement or at least have a runway.

Funding the disability trigger: three tools, three jobs

Which combination fits depends on the size of the shares, the partners’ ages and health, and what the agreement says a disability trigger is. The definitions matter more than the products: a 90-day disability and a 12-month one are different contracts and different prices.

If the agreement has a disability clause with no funding behind it, the honest fix is to put the clause and the products in front of the accountant and broker together, and decide which of the three above the company is willing to pay for. The trade-offs between the first two are laid out in critical illness versus disability insurance, and a corporate critical illness quote can be run on the same evidence as the life application.

And whichever tools you pick, write the exit into the agreement now: what happens to the policies when a partner leaves, when the company sells, and when someone is alive but out. The four files above all had a signed agreement. None of them had that page.

Bank-Required Life Insurance Is Not Buy-Sell Insurance

A policy your lender requires as collateral for a business loan protects the lender first. On death the insurer pays the assignee, the bank, up to the loan balance, and only what is left reaches the corporation. It does not fund a share purchase, and a partner who assumes the loan policy doubles as buy-sell coverage has an unfunded agreement plus a paid-off bank. The two needs are sized differently, owned the same way, and usually placed as separate policies on the same life.

I see this most with professional practices. Two dentists buying into a corporation together had a bank that required two coverage tranches on each of them, every policy corporately owned and collaterally assigned to the lender. That is loan protection. The buyout between the two of them was a third conversation, and their existing personal policies were repurposed only until the new coverage issued.

Two pieces of paper that decide who owns the money

The deductibility exception in the tax section above is the one place the bank policy comes out ahead: premiums on a policy the lender requires as collateral can be partly deductible, where a buy-sell policy’s cannot. That is a reason to keep the two policies separate, not a reason to combine them. Owners of incorporated practices, including dentists and physicians with association coverage, usually arrive with the bank’s requirement already met and the partner’s buyout still open.

Buy-Sell Life Insurance FAQ

Before You Sign Anything, Answer the Two Questions

Who would be legally required to buy the shares if a partner died tonight, and where would the insurance cheque go? If your shareholder agreement and your policies give the same answer to both, you are ahead of most incorporated businesses in Canada. If they do not, or you are not sure, that is the review to book before anyone applies for anything. It is my job to find those answers before applying, so the insurer receives a complete, properly justified file with as little avoidable back-and-forth as possible.

Protect Your Wealth is an independent brokerage that compares life insurance companies across Canada rather than selling one, including no-medical options for a partner whose health complicates the standard route. Talk to a broker directly or call 1-877-654-6119. We are based in Hamilton and serve business owners across Ontario, British Columbia, Alberta, Manitoba, Saskatchewan, New Brunswick and Nova Scotia, including Guelph, Victoria, Lethbridge and Winnipeg.