Term Life Insurance in Ontario: Funding a Buy-Sell Agreement Between Business Partners

When I sit down with two business partners, we often talk about growth, hiring, and the next big contract. The harder conversation is what happens to ownership if one of you dies unexpectedly.

Most partners have never actually funded that plan. They may have a shareholder agreement on paper, or a handshake understanding that the surviving partner will look after the family. Without cash in place at the right time, that promise is very difficult to keep.

That is where life insurance comes in. Term life insurance can fund a buy-sell agreement so the surviving partner can buy the shares, the family receives fair value, and ownership stays clear.

What a Buy-Sell Agreement Actually Does

A buy-sell agreement is a written agreement between business owners that sets out what happens to shares when a trigger event occurs. Death is the most common trigger I plan for, but agreements can also address disability, retirement, or a partner wanting to exit.

Without an agreement, a deceased partner’s shares usually pass to their estate or spouse. That can leave a surviving partner in business with someone who never planned to run the company, and a family holding shares they cannot easily sell for cash.

A clear agreement sets a price or a method to determine it, gives the surviving partner or the company the right or obligation to buy the shares, and sets a timeline so the business can keep operating. A lawyer drafts the agreement. My role is to help make sure there is funding behind it.

Why Term Life Insurance Fits the Funding Job

A buy-sell obligation creates a large, specific need for cash at a specific moment. If a partner dies, the surviving partner needs funds quickly to complete the purchase. Borrowing that amount on short notice, or paying it from operating cash flow over many years, puts strain on the business at the worst possible time.

Term life insurance fits this job because it provides large coverage for a comparatively low premium during the active building years, when partners are most essential to revenue, client relationships, and loan or lease guarantees.

I recommend term in many cases because the need is tied to your working and ownership years together. Permanent coverage has a place for a few unique lifelong or estate needs, but it is not the default for funding a standard buy-sell agreement. Term provides the funding efficiently and leaves cash available to run the business.

Two Common Ways the Funding Is Structured

There are two structures I see most often, and your lawyer and accountant need to confirm which one fits your situation.

In a cross purchase structure, each partner owns a policy on the other partner’s life. When one partner dies, the surviving partner receives the benefit and uses it to buy the shares from the estate or family.

In a corporate owned structure, sometimes called a share redemption approach, the corporation owns the policies and uses the benefit to redeem the deceased partner’s shares. The tax and accounting treatment is different, including how the capital dividend account may be involved in a private corporation.

You should never copy a structure from another company without advice. My job is to make sure the amount, owner, beneficiary, and agreement all line up. A mismatch between the policy and the agreement is one of the most common problems I find in a review.

The Right Amount Comes From a Valuation, Not a Formula

I am often asked how much coverage partners should carry for a buy-sell. I never answer that with a formula or a rule of thumb, because a business is not valued that way.

The amount should follow the value you have agreed on for the business, updated as that value changes. That starts with a real conversation and, in many cases, a formal or informal valuation. You may agree on a fixed price you review annually, or a formula in the agreement based on earnings or book value. Either way, the insurance should track that agreed value.

If coverage is too low, the surviving partner still has a gap to finance. If it is too high, you are paying for funding you do not need. Revisit the number when the business grows, takes on debt, or adds a partner. A buy-sell funded five years ago may no longer reflect the company you have built today.

Choosing the Term and Keeping the Agreement Current

Term length should match how long you expect to be partners. For many owners, that means coverage to a planned retirement age or exit window. A 20 year or 25 year term may cover the core building years for partners in their thirties and forties.

Convertibility is worth discussing. If plans change, the ability to convert some term coverage to permanent coverage without new medical evidence can be valuable for a separate estate or lifelong need.

Review three items together every few years, or after any major change. Is the agreement current and signed. Does the valuation still make sense. Does the insurance still match the agreement. If you also offer employee benefits to your team, that is separate. Group coverage does not fund a shareholder buyout.

What This Looks Like in Ontario

A note for my Ontario readers, because most of the partnerships I advise are incorporated and operating here.

In Ontario, shareholder agreements for private corporations are typically governed under the Ontario Business Corporations Act. Life insurance here is regulated by the Financial Services Regulatory Authority of Ontario, and policies with a named beneficiary generally pay directly to that beneficiary outside the estate. Ownership and beneficiary setup therefore needs careful attention, especially in a corporate owned structure.

I work with partners in Toronto, Mississauga, Vaughan, Hamilton, Ottawa, London, and the Waterloo area, from professional practices to trades, manufacturing, and tech firms. The pattern is similar. Owners have built something valuable together, families depend on that value, and there is no funded plan if one owner does not come home. See how I work with clients across the province on my Ontario page.

If your agreement was drafted when the business was much smaller, the valuation method may now be outdated. Bring your lawyer, accountant, and insurance advisor into the same conversation before you simply renew a policy.

Start With the Agreement, Then Fund It Properly

If you have partners, I recommend a simple order. First, confirm you have a signed buy-sell agreement that reflects how you would want ownership handled today. Second, confirm the valuation you would use if something happened this year. Third, check that you have term coverage in place, in the right amount and structure, to fund that agreement. If any of those three pieces is missing, that is your starting point.

If you would like to review your buy-sell funding, book a consultation and we will go through your agreement and current coverage together. We will check whether the amount still matches your business value, and whether your ownership would stay clear for your partner and your families.

Corey Abrams, GBA, CHS
President and Insurance Broker, Abrams Insurance