An entity agreement is a buy-sell arrangement in which a business uses insurance to fund the purchase of an owner’s interest after death or another trigger event. In plain language, the company is the buyer, and insurance is often the cash source that makes the buyout possible.
How the insurance structure works
In a typical entity purchase plan:
- the business owns the life insurance policy on each owner
- the business pays the premium
- the business is the beneficiary
- when an insured owner dies, the death benefit gives the business liquidity to buy that owner’s shares or partnership interest
Some agreements also address disability, retirement, or voluntary departure, although those events may require separate funding because life insurance only pays at death.
Why businesses use it
Without a funded agreement, the surviving owners may want to keep the business running but may not have cash available to buy out the deceased owner’s estate. That can create disputes over control, valuation, and timing. An entity agreement reduces that risk by matching a legal transfer obligation with an identified funding source.
Underwriting matters too. If one owner is older or less insurable, the cost of coverage can be uneven. The agreement still has to address ownership percentages, valuation formulas, and what happens if insurance is unavailable or insufficient.
Practical example
A three-owner manufacturing company signs an entity agreement. The company buys life insurance on each owner based on the agreed valuation formula. One owner dies unexpectedly. The company receives the death benefit and uses it to purchase that owner’s shares from the estate, allowing the surviving owners to keep operating the business without a forced asset sale.