Can a Business Sell a Life Insurance Policy It Owns? (2026)

The Three Situations Where Corporate Policies Become Surplus

Key-person coverage after the key person leaves. A company insures an executive whose departure would materially damage the business. Then that executive retires, and nobody cancels the policy. Premiums keep flowing on coverage that protects against a risk that ended. This is the single most common corporate settlement fact pattern, and finance departments frequently discover it during a routine balance sheet review.

Buy-sell funding after the agreement changes. Cross-purchase and entity-redemption arrangements are funded with life insurance on the owners. When a partner exits, dies, or the agreement is restructured — often after a recapitalization or a shift from cross-purchase to entity purchase — some of the underlying policies become orphaned. They still exist, still cost money, and no longer match the agreement they were bought to fund.

COLI and BOLI blocks in a wind-down. Corporate-owned and bank-owned life insurance is often purchased in blocks to informally fund deferred compensation or benefit obligations. When a company is acquired, dissolves a plan, or winds down, those blocks need an exit. Surrender is the default choice, and it is frequently the worst available one — a settlement can pay meaningfully more for policies on older insureds.

In all three cases the question is the same: is this policy still doing a job? If not, the choices are keep paying, surrender, or sell.

IRC Section 101(j): The Compliance Trap That Cannot Be Fixed Later

This deserves the most attention on the page because it is where corporate policies most often fail review.

Section 101(j) was added by the Pension Protection Act of 2006. Broadly, for employer-owned life insurance contracts issued after August 17, 2006, the death benefit is only excludable from the employer’s income to the extent of premiums paid — meaning the rest becomes taxable — unless specific notice and consent requirements were satisfied before the policy was issued and an applicable exception is met.

The notice and consent requirements generally include: written notice to the employee that the employer intends to insure their life, notice of the maximum face amount for which the employee could be insured, written consent from the employee to being insured, and notice that the employer will be a beneficiary of the death proceeds — including after the employment relationship ends. The exceptions generally relate to the insured’s status, such as being a director, a highly compensated employee, or an owner, or to arrangements where proceeds are paid to the insured’s heirs or used to buy an equity interest.

The trap: this is a pre-issuance requirement. If the paperwork was never obtained in 2011, it cannot be created in 2026. Companies also have an annual reporting obligation on Form 8925 for employer-owned contracts. Verify current 2026 IRS rules and reporting requirements with tax counsel — the details matter and the statute has been interpreted through subsequent guidance.

Practically, a buyer’s diligence will ask for the notice and consent documentation. Find it before you start. If it does not exist, that changes the analysis of what the policy is worth to the company as a held asset, and it is a conversation for the CPA before it is a conversation with a buyer.

The Transfer-for-Value Rule Under Section 101(a)(2)

Life insurance death benefits are generally income-tax-free to the beneficiary. Section 101(a)(2) creates an exception: when a policy is transferred for valuable consideration, the death benefit becomes taxable to the transferee except to the extent of the consideration paid plus subsequent premiums — unless a safe-harbor exception applies.

The traditional exceptions include transfers to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer, and transfers where the transferee’s basis carries over from the transferor.

Two things a business should understand. First, this rule primarily affects the buyer’s tax position, not the seller’s proceeds, and buyers price it into what they offer. Second, and more important for corporate owners: the transfer-for-value rule is a live consideration in ordinary business restructuring too. Moving a policy between related entities, transferring a policy as part of a buy-sell restructuring, or distributing a policy to a departing owner can all trip it. Companies sometimes discover an old transfer-for-value problem only when a settlement buyer’s diligence surfaces it.

The 2017 Tax Cuts and Jobs Act also added reporting requirements for reportable policy sales, generally requiring information returns from acquirers and issuers. Verify the current 2026 forms and thresholds with tax counsel. None of this is a reason to avoid a sale; it is a reason to have the CPA in the room from the beginning.

Authority: Corporate Resolution and Signing Power

The buyer needs to know that the person signing can bind the entity. Expect diligence on this, and gather it early.

• A corporate resolution or written consent of the board of directors, members, or partners specifically authorizing the sale of the identified policy and naming who may execute the documents.
• Organizational documents — articles of incorporation or organization, bylaws or operating agreement — showing that the resolution was validly adopted.
• Evidence of good standing from the state of formation.
• An incumbency certificate confirming the officers and their signature authority.
• The entity’s taxpayer identification number.
• The policy documents — cover page, current statement, and an in-force illustration from the carrier.
• A HIPAA authorization signed by the insured individual. The company owns the policy but cannot release someone else’s medical records.

That last item is worth flagging early. Selling key-person coverage requires the cooperation of a person who may no longer work for the company, may not have thought about the policy in years, and may have questions about why a former employer is asking for their medical records. Approach that conversation directly and respectfully, and be prepared to explain the whole picture. If the insured declines, the transaction generally cannot proceed.

Policy Purpose	Why It Becomes Surplus	Check First
Key-person coverage	The executive retired or departed	Issue date and IRC 101(j) notice and consent
Cross-purchase buy-sell	A partner exited or the agreement was restructured	Whether the agreement still references the policy
Entity-redemption buy-sell	Ownership structure changed	Transfer-for-value exposure under IRC 101(a)(2)
COLI / BOLI block	Plan terminated or company winding down	Whether deferred comp obligations remain
Deferred comp / SERP funding	Benefit obligations settled	Whether the informal funding is still needed

Hypothetical Math on Orphaned Key-Person Coverage

All figures below are hypothetical and illustrative only.

Consider a hypothetical manufacturing company holding a $1,500,000 universal life policy on a founder who retired at 68 and is now 79. The annual premium is $38,000, cash surrender value is $91,000, and the company has paid roughly $520,000 in premiums since issue in 2004.

The company’s three options look like this. Keep paying: $38,000 a year for a benefit the business no longer needs, with cost-of-insurance charges likely to rise as the insured ages. Surrender: receive $91,000, with any excess over the company’s basis generally taxed as ordinary income to the corporation. Sell: a settlement offer somewhere in the historical range the federal GAO study described — roughly 10% to 35% of face value, about 4 to 8 times cash surrender value on average (GAO-10-775).

Even a conservative offer in that range would be a multiple of the surrender value, and the company also stops the $38,000 annual outflow. On the balance sheet, the policy typically carries at cash surrender value, so proceeds above that amount produce a gain the CFO will need to plan for.

Note the 2004 issue date in this hypothetical: it predates the August 17, 2006 effective date for Section 101(j), which changes the notice-and-consent analysis. That single detail is why the issue date is one of the first things to check on any corporate policy.

When a Business Should Keep the Policy Instead

A sale is not automatically right just because a policy looks idle. Several situations argue the other way.

• The buy-sell agreement is still in force and still references the policy. Selling coverage that funds a live obligation creates a liability with no funding source. Have counsel review the agreement before anything else.
• The policy informally funds deferred compensation or a SERP. If the company still owes those benefits, the asset is doing a job even if the accounting is informal.
• The key person is still key. Retirement from an operating role does not always end the risk — some founders remain central to lender relationships or customer contracts.
• The cash value is being used as a financing tool. Some companies borrow against COLI cash value as a liquidity source. Selling ends that.
• The insured objects. Cooperation is required for medical records, and forcing the issue with a former employee is rarely worth it.
• Surrender simply nets more after costs. On smaller policies or where cash surrender value is high relative to face amount, surrender can be the better number — and it takes weeks rather than months.
• A short-term cash need could be met by a policy loan. Borrowing may beat unwinding an asset the company may still want.

Process and Realistic Timing for a Corporate Sale

Corporate transactions follow the same arc as individual ones and take about as long — 60 to 120 days — with more documentation on the ownership side.

• Internal review (1–3 weeks). Identify the policy, confirm the issue date, locate the 101(j) notice and consent if issued after August 17, 2006, review any buy-sell or deferred compensation agreement it supports, and confirm the accounting carrying value.
• Free policy review (days). Send the policy cover page — insurer, policy number, face amount, issue date.
• Authority documents. Board or member resolution, organizational documents, good standing, incumbency certificate, TIN.
• Insured cooperation and records (2–6 weeks). HIPAA authorization from the insured; medical records requested from treating physicians. No new medical exam is required — see why there is no exam.
• Underwriting and offers (2–4 weeks). Independent life expectancy reports; then offers, with gross amount, commissions, and net to the company shown separately.
• Contracts, escrow, and funding (2–6 weeks). Funds sit with an independent escrow agent until the carrier records the ownership change.
• Rescission window. Most regulated states provide a short period afterward to unwind — see how rescission works.

Build board meeting schedules into the timeline. Waiting six weeks for a quarterly board meeting to ratify a resolution is a common and avoidable delay.

Tax Reporting and Red Flags

General information, not tax advice. The company’s CPA should determine treatment before closing.

For a business seller, the policy typically carries on the books at cash surrender value, and proceeds above that generally produce a gain. Basis is generally total premiums paid without reduction for cost-of-insurance charges under the Tax Cuts and Jobs Act of 2017 and IRS Revenue Ruling 2020-05, though the character of the gain for a corporate taxpayer differs from the individual analysis. The 2017 law also introduced reporting for reportable policy sales, generally requiring information returns from acquirers and issuers. Verify the current 2026 forms and requirements with tax counsel.

Red flags in corporate transactions:

• A buyer who never asks for authority documentation. Legitimate diligence always does.
• Anyone who waves off the 101(j) question. It is the most important compliance item on the file.
• Pressure to close before the board has formally authorized the sale.
• An offer to pay a finder’s fee or referral payment to an officer personally. That is a conflict of interest and potentially far worse.
• Undisclosed commissions. Ask a life settlement broker for compensation in dollars.
• Funds released outside independent escrow. Never transfer ownership against a promise of later payment.
• Any upfront fee. A legitimate review costs the seller nothing.

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Frequently Asked Questions

Can a business sell a life insurance policy it owns?

Yes. Corporations, LLCs, and partnerships regularly sell key-person policies, orphaned buy-sell funding, and COLI or BOLI blocks. The entity is the seller and needs a resolution authorizing the sale plus evidence of signing authority. The insured individual must separately sign a HIPAA authorization, since only they can release their own medical records.

What is IRC Section 101(j) and why does it matter?

It generally limits the income-tax exclusion for death benefits on employer-owned policies issued after August 17, 2006 unless specific written notice and consent were obtained from the insured employee before the policy was issued and an exception applies. Because it is a pre-issuance requirement, missing documentation cannot be created after the fact. Locate the paperwork before you begin and verify current 2026 rules with tax counsel.

What is the transfer-for-value rule?

Under IRC Section 101(a)(2), when a policy is transferred for valuable consideration the death benefit can become taxable to the transferee except to the extent of consideration paid plus later premiums, unless a safe-harbor exception applies. It mainly affects the buyer’s position and is priced into offers. It also matters in ordinary restructuring — moving policies between related entities can trip it.

What corporate documents will we need?

Typically a board or member resolution authorizing the sale and naming the signer, organizational documents, evidence of good standing, an incumbency certificate, the entity’s taxpayer identification number, and the policy cover page, statement, and in-force illustration. Gathering these early prevents delays, especially if a board meeting is required to adopt the resolution.

Does the insured have to cooperate?

Yes, in practice. The company owns the policy but cannot release another person’s medical records, so the insured must sign a HIPAA authorization. With retired executives this requires a direct, respectful conversation about what is happening and why. If the insured declines, the transaction generally cannot proceed.

How much can a company expect to receive?

The federal GAO study of the secondary market (GAO-10-775) found sellers historically received roughly 10% to 35% of face value, about 4 to 8 times cash surrender value on average. Those are historical ranges, not a quote. Actual pricing depends on the insured’s age and health, the ongoing premium, and the policy’s existing cash value.

When should the business keep the policy instead?

When a buy-sell agreement still references it, when it informally funds deferred compensation the company still owes, when the insured remains genuinely key to the business, or when the cash value is being used as a financing tool. On smaller policies surrender can also simply net more after costs and takes weeks rather than months.

How is the sale reported for the company’s taxes?

The policy typically carries on the books at cash surrender value, and proceeds above that generally produce a gain. Basis is generally total premiums paid without reduction for cost-of-insurance charges, and the 2017 tax law added information reporting for reportable policy sales. Have the company’s CPA determine treatment and verify the current 2026 forms before closing — this is general information, not tax advice.

Related Reading

• Can I Sell A Policy Owned By A Trust
• What Policies Qualify For Life Settlement
• Do I Have To Take A Medical Exam
• What Is A Rescission Period
• What Is A Life Settlement Broker
• How It Works Policy Options

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Pine Lake Life Solutions does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.