July 30, 2026
4:38 pm

Buy-Sell Agreement Ended: What to Do With the Insurance Behind It

When a buy-sell agreement terminates — because the partnership dissolved, the business sold, or a partner retired — the life insurance that funded it becomes surplus, and a surplus policy on an older partner can often be sold for several times its cash surrender value. Buy-sell funding policies are among the most commonly orphaned contracts in the insurance world. Partners set up cross-purchase or entity-purchase coverage decades ago, the business relationship eventually ends, and the policies quietly stay in force with someone still paying the premiums — or lapse with nothing to show for years of payments.

There is also a fresh reason owners are revisiting these arrangements in 2026. The U.S. Supreme Court’s 2024 decision in Connelly v. United States held that life insurance proceeds a corporation receives to redeem a deceased owner’s shares count in valuing the company for estate tax purposes, without an offsetting deduction for the redemption obligation — a result that has pushed many businesses to restructure entity-owned buy-sell funding (verify how the decision applies to your structure with counsel). Restructuring often leaves existing policies unneeded, which is exactly when the settlement market is worth a look.

This guide covers the exits for unneeded buy-sell policies — keep, transfer, surrender, or sell — the tax rules that shape each path, and how to get a free policy review. Call (305) 209-7183 or send the policy cover page to start.

In This Article

Cross-Purchase vs. Entity-Purchase: Who Owns the Orphaned Policy
Why Connelly v. U.S. Is Sending Owners Back to the Drawing Board
Option 1: Keep the Policy Anyway
Option 2: Transfer the Policy to the Insured
Option 3: Surrender — the Default That Often Underpays
Option 4: Sell the Policy in a Life Settlement
Coordinating With Your Former Partner
Next Steps: Price the Policy Before You Decide
Frequently Asked Questions

Buy-Sell Agreement Ended: What to Do With the Insurance Behind It

Cross-Purchase vs. Entity-Purchase: Who Owns the Orphaned Policy

How the buy-sell was structured determines who controls the surplus policy. In a cross-purchase arrangement, each partner personally owns a policy on the other partners — so when the agreement ends, you may personally own a policy on a former partner’s life, and they may own one on yours. In an entity-purchase (redemption) arrangement, the company owns policies on each owner — so the business controls the exit, and corporate authority and employer-owned-contract rules come into play.

Either way, the owner of record holds the property rights, including the right to surrender or sell. Insurable interest was valid when the policies were issued (business partners have a recognized insurable interest in each other), and that validity does not evaporate when the partnership does — a properly issued policy remains sellable even after the relationship that justified it ends.

Why Connelly v. U.S. Is Sending Owners Back to the Drawing Board

In June 2024, the Supreme Court decided Connelly v. United States, a case about two brothers whose corporation owned life insurance to redeem a deceased brother’s shares. The Court held the insurance proceeds counted toward the company’s estate-tax value without a deduction for the redemption obligation — increasing the taxable estate. The practical effect: many advisors now steer clients away from entity-owned redemption funding and toward cross-purchase structures or insurance-only LLCs (verify the right response for your situation with estate counsel; the decision’s application varies by structure and facts).

Restructuring a buy-sell often strands the old funding policies. A corporation converting from redemption to cross-purchase funding may distribute, sell, or replace its policies; partners unwinding coverage may find themselves owning contracts that no longer match any agreement. Before any of those policies are surrendered or allowed to lapse, they should be priced — a policy on a partner now in their 60s or 70s is precisely the profile the settlement market pays for.

Option 1: Keep the Policy Anyway

Nothing forces you to dispose of a policy just because the agreement behind it ended. If you own a permanent policy on a former partner and the premiums are manageable, holding it to collect the eventual death benefit can be economically rational — you have insurable-interest history from issue, and the death benefit is generally income-tax-free to a beneficiary (subject to the transfer-for-value rules if the policy changed hands for value along the way; verify with a tax advisor).

The honest difficulty is relational and financial: paying premiums for years on a former partner’s life is an odd position, universal life premiums often climb with age, and your capital may have better uses. Request an in-force illustration from the insurer showing the true cost of keeping the policy to life expectancy — that document turns a vague feeling into a decision you can defend.

Option 2: Transfer the Policy to the Insured

The cleanest emotional exit is often selling or transferring the policy to the former partner it insures. They may want the coverage for their own family — especially if health changes since issue would make new insurance costly or unavailable. A sale to the insured at fair value fits a recognized exception to the transfer-for-value rules, which helps preserve the death benefit’s tax-free character for their beneficiaries (verify the mechanics with tax counsel).

Price it fairly: the policy’s fair market value may exceed its cash surrender value, particularly for an older or health-impaired insured. Getting a settlement-market read first tells both sides what the policy is actually worth, so an insider transfer does not accidentally shortchange the seller.

Exit for a Surplus Buy-Sell Policy	Cash Today	Best When	Key Caution
Keep and hold	None — premiums continue	Premiums low; owner wants the eventual death benefit	Rising UL costs; awkward stake in an ex-partner’s life
Transfer/sell to the insured	Sale price if sold at fair value	Insured wants coverage; health makes new insurance costly	Paper it with tax counsel; price against market value, not CSV
Surrender	Cash surrender value	Small policy or young, healthy insured	Often the lowest number; term has nothing to surrender
Life settlement sale	Typically 10–35% of face value (GAO-10-775)	Face $100k+; insured 65+ or health declined	60–120 days; needs insured’s cooperation; use escrow

Option 2: Transfer the Policy to the Insured

Option 3: Surrender — the Default That Often Underpays

Surrendering returns the policy’s cash surrender value, with any gain over basis taxed as income. It is quick, and for small policies or young, healthy insureds it may genuinely be the best available number. But surrender is priced by the insurer’s contract terms, not by the market — and the federal GAO’s study of the settlement market (GAO-10-775) found that sellers typically received about 10% to 35% of face value, roughly 4 to 8 times what surrender would have paid. Term buy-sell coverage has no surrender value at all, so lapsing it recovers nothing even after years of premiums.

The disciplined move is to treat surrender as the floor: get the surrender quote from the insurer, get a market read on the policy, and choose with both numbers on the table. Our comparison of life settlement vs. surrender walks through the math, and our guide to cash surrender value explains what the surrender figure does and does not include.

Option 4: Sell the Policy in a Life Settlement

A surplus buy-sell policy can be sold to an institutional buyer for a lump sum. What the market screens for: a death benefit of $100,000 or more, a policy in force at least two years, and an insured who is a senior or whose health has changed since issue. Universal life and whole life qualify directly; term coverage qualifies when it is still convertible to permanent insurance — buyers convert as part of the transaction, so check the conversion deadline before it expires. See what policies qualify for the full criteria.

Mechanics to expect: the insured former partner must cooperate with medical records and a HIPAA authorization; entity-owned policies need corporate resolutions establishing signing authority; funds should close through an independent escrow agent; and the process typically runs 60 to 120 days. If a broker shops the policy, insist on seeing gross and net offers so commissions are visible. Never pay upfront fees to sell — legitimate buyers are paid from the transaction, not before it.

Coordinating With Your Former Partner

Buy-sell exits usually involve two or more people holding mirror-image policies, which creates natural deal structures: partners can each sell their surplus policies, swap policies so each insured ends up owning their own coverage (with tax counsel papering the transfers), or agree that one buys the other out of a contract. The keys are transparency and paper — put the plan in writing, price the policies against real market data rather than guesses, and involve the accountants who handled the original agreement.

Where the split was contentious, a neutral market sale can be the least painful path: the policy converts to cash at arm’s length, and neither ex-partner has to keep a financial stake in the other’s lifespan.

Next Steps: Price the Policy Before You Decide

Every option above gets easier with one piece of information: what the policy is actually worth. A free policy review provides it — send the policy’s cover page (the first page showing insurer, policy number, face amount, and issue date), and a specialist will tell you whether it is a realistic settlement candidate and what similar policies have brought. There is no cost and no obligation, and the number is just as useful if you ultimately keep, transfer, or surrender the policy. Call (305) 209-7183 or start with our Education Center and how the process works. Pine Lake Life Solutions provides education and policy reviews; the estate-tax and restructuring questions Connelly raises belong with your own attorney and CPA.

Frequently Asked Questions

Can I sell a life insurance policy I own on a former business partner?

Generally yes. Insurable interest is tested at issue, and business partners had a valid interest when the buy-sell coverage was purchased, so the policy remains your sellable property after the partnership ends. Buyers will need the insured former partner’s cooperation for medical records and a HIPAA authorization.

What did Connelly v. United States change about buy-sell insurance?

The 2024 Supreme Court decision held that insurance proceeds a corporation receives to redeem a deceased owner’s shares count in the company’s estate-tax value without an offsetting deduction. Many advisors now favor cross-purchase structures over entity-owned redemption funding, and restructuring often leaves old policies surplus. How it applies to your business depends on your structure — confirm with estate counsel.

Our buy-sell coverage is term insurance. Is it worth anything now?

Possibly. Term has no cash surrender value, but a term policy that is still convertible to permanent coverage can be sold — buyers convert it as part of the transaction. Check the conversion deadline with the insurer right away, because an expired conversion window usually ends the opportunity.

Is it better to sell the policy to my ex-partner or to the market?

It depends on price and intent. Selling to the insured fits a recognized transfer-for-value exception and gives them coverage they may not be able to buy new. But price it against a real market read, not just cash surrender value — otherwise you may sell an asset worth several times more. Getting both numbers first protects both sides.

How much do surplus buy-sell policies sell for?

The federal GAO study (GAO-10-775) found sellers typically received about 10% to 35% of face value — roughly 4 to 8 times cash surrender value. Actual offers depend on the insured’s age and health, the premium schedule, and policy type. A free review gives you a policy-specific range with no obligation.

Who has to sign off if the company owns the buy-sell policies?

An officer or member with authority to sell company assets, supported by corporate resolutions the buyer will request. If the company is restructuring after Connelly or winding down, sequence the policy sale with counsel so it closes while the entity can properly convey the asset.

What happens if we just let the old buy-sell policies lapse?

The coverage ends and all value is forfeited — including any secondary-market premium on policies covering older or health-impaired partners. Before lapsing anything, get the surrender quote and a market read; the comparison takes days and can be worth many times the effort.

How long does selling a buy-sell policy take?

Typically 60 to 120 days from application to funding. Add time up front for gathering the policy, an in-force illustration, corporate authority documents if the entity owns it, and the insured’s authorization. Starting the document collection early is the best way to keep the timeline short.

Find out what your policy is worth — free, confidential, no obligation.

A 15-minute educational review covers your eligibility, every alternative, and a realistic view of what each path would net you.

Call (305) 209-7183 · Request a review online →

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