An insurance LLC is a separate LLC, taxed as a partnership, whose members are the business owners and whose only job is to own one life policy on each owner. When an owner dies, the LLC collects the death benefit and distributes it to the surviving owners, who use it to buy the deceased owner's shares under the buy-sell. When it is properly structured, you get cross-purchase results (basis step-up for survivors, proceeds outside the operating company after Connelly) with one policy per owner instead of 12 or 20, and a transfer to a partnership the insured belongs to is an exception to the transfer-for-value rule.
We are licensed insurance brokers, not CPAs or attorneys. Treat the tax and legal points on this page as general education, and confirm them with your own CPA or attorney before acting.
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The problem with big cross-purchases
A cross-purchase buy-sell needs a policy on every owner owned by every other owner. That is 12 policies for four owners and 20 for five. Each owner tracks and pays for several policies, premiums are unequal when ages differ, and when one owner dies, the policies the deceased owned on everyone else have to be sold or transferred, raising transfer-for-value questions. An entity redemption avoids all that but, after the 2024 Connelly decision, puts the insurance proceeds into the operating company's value.
How an insurance LLC works
- The owners form a new LLC taxed as a partnership, with an operating agreement that says it exists to hold buy-sell insurance.
- The LLC buys one policy per owner, funded by contributions from the members (often from bonuses or distributions out of the operating company).
- The LLC agreement allocates each policy to the members other than the insured, typically by special allocation, so the economics mirror a cross-purchase.
- When an owner dies, the LLC collects the death benefit and distributes it to the surviving members, who buy the deceased owner's shares in the operating company as the buy-sell requires.
- The deceased owner's interest in the LLC is redeemed or bought out under the LLC agreement, and the remaining policies stay in place without being transferred.
Why transfer for value is easier here
Section 101(a)(2) taxes a death benefit when a policy is transferred for value, with exceptions. Two of those exceptions are transfers to a partner of the insured and transfers to a partnership in which the insured is a partner. An LLC taxed as a partnership counts. That means:
- Existing policies can often be moved into the insurance LLC from the owners or from an operating corporation without losing tax-free treatment.
- After a death, no policy has to change hands among the survivors.
The IRS has issued private letter rulings approving arrangements like this, but those rulings bind only the taxpayers who asked for them, and the LLC must have a genuine business purpose and be respected as a partnership. This is attorney-drafted work.
Compared with the alternatives
| Cross-purchase | Entity redemption | Insurance LLC | |
|---|---|---|---|
| Policies for 5 owners | 20 | 5 | 5 |
| Basis step-up for survivors | Yes | No (C corp) | Yes |
| Proceeds in operating company value | No | Yes (Connelly) | Generally no |
| Admin | Heavy with many owners | Light | Moderate: a separate LLC, tax return and agreement |
| Policy changes after a death | Deceased's policies must be sold or transferred | None | None |
Costs and upkeep
Expect legal fees to set up the LLC and draft the agreements, an annual partnership tax return (Form 1065 and K-1s), and someone to manage premium payments and keep records. The operating company usually funds premiums by paying bonuses or distributions that members contribute to the LLC. For groups of four or more owners, or any group switching away from a corporate-owned redemption, the upkeep is usually worth it.
Size the policies with the buy-sell funding calculator, which shows the policy count and amounts for each structure.
Frequently asked questions
Is an insurance LLC the same as a trusteed cross-purchase?
They solve the same problem. In a trusteed cross-purchase, an escrow agent or trustee holds the policies for the owners. An insurance LLC holds them in an entity taxed as a partnership, which also brings the partnership exceptions to the transfer-for-value rule.
Does an insurance LLC need the 101(j) consents?
Many advisors treat the LLC as an employer-related policyholder and get notice and consent from each insured before issue, since the cost is minimal and the downside of skipping it is large.
Can we move our existing corporate-owned policies into the LLC?
Often yes, because a transfer to a partnership in which the insured is a partner is an exception to the transfer-for-value rule. The transfer can still have other tax effects for the corporation, so have your CPA review it first.
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Written by Erik Moran
Erik co-owns Moran Insurance Group with Amanda Moran and handles the agency's life insurance cases, from key person and buy-sell coverage to trust-owned policies. He works alongside clients' CPAs and attorneys, who make the tax and legal calls. More about Erik.
Sources
Moran Insurance Group is a licensed insurance agency. Our brokers are not CPAs, attorneys or tax advisors, and nothing on this page is tax, legal or investment advice. Tax figures and rules reflect our understanding as of October 2026 and can change. Coverage is subject to carrier underwriting and state availability. Confirm anything tax or legal with a licensed CPA or attorney before you act on it.