Company-owned policies (key person, entity buy-sell, split dollar) need a decision in every sale. In a stock sale the policies stay with the company unless they are moved out first. In an asset sale they stay with the seller's entity unless transferred. A common move is to transfer each policy to the insured person, an exception to the transfer-for-value rule, so the owner keeps valuable coverage. Watch for transfer-for-value problems on other transfers, reportable policy sale reporting, the cash value's effect on the purchase price, and fresh 101(j) consents if a buyer keeps policies.
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.
On this page
Start with an inventory
Before letters of intent turn into purchase agreements, list every policy the company owns or pays for: carrier, policy number, insured, owner, beneficiary, death benefit, cash surrender value, any loans, and any agreements (buy-sell, split dollar, collateral assignments). Buyers' due diligence will ask, and policies with cash value are assets that affect the price.
Stock sale vs asset sale
| Stock (or membership interest) sale | Asset sale | |
|---|---|---|
| Where policies end up by default | With the company, now owned by the buyer | With the seller's entity |
| Typical action | Transfer policies out to the insureds before closing, or exclude them in the price | Keep in the seller's entity, transfer to insureds, or surrender |
| Watch for | Reportable policy sale reporting when buying an entity that holds policies | Transfers to the buyer may be transfers for value |
Your options for each policy
- Transfer to the insured. A common choice for an owner's key person or buy-sell policy. A transfer to the insured is an exception to the transfer-for-value rule, so the death benefit stays income-tax-free. The value transferred may be taxable to the insured (as compensation or a distribution), usually measured by the policy's value, so plan the timing with your CPA.
- Keep it in the selling entity after an asset sale, if the entity continues and still needs it.
- Let the buyer keep it, for example key person coverage on employees who stay. The buyer should get its own 101(j) notice and consent analysis done, since it is now the employer-owner.
- Surrender it for its cash value. Any gain above the premiums paid is taxable, and the insured loses coverage that may be hard to replace.
- Sell it in a life settlement if the insured is older or in poorer health; usually only relevant for permanent policies.
The transfer-for-value trap
When a policy is transferred for value, the later death benefit becomes taxable above what the new owner paid, unless an exception applies. Exceptions include transfers to the insured, to a partner of the insured, to a partnership in which the insured is a partner, and to a corporation in which the insured is a shareholder or officer. Transfers to a co-shareholder, or to an unrelated buyer, are not on the list. Since 2018, the tax code also has rules for reportable policy sales (Section 101(a)(3) and Section 6050Y) that can apply when someone acquires a policy, or an interest in an entity holding policies, with reporting obligations and fewer exceptions. Regulations carve out some ordinary business acquisitions, but this needs your CPA's review before closing.
Cash value and the price
A permanent policy with significant cash value is a company asset. If the buyer is paying for the company's balance sheet, either the cash value is part of the price or the policy comes out before closing (which reduces what the buyer is getting). Make sure the purchase agreement says which.
Do not forget the buy-sell
A sale to an outside buyer usually ends the owners' buy-sell agreement. If you are selling to a co-owner or key employee instead, existing buy-sell policies can sometimes be repurposed to fund the purchase, or the buyer will need new coverage on you while they pay off a seller note. See term vs permanent for buy-sell funding and, for seller financing, life insurance for a business loan.
Frequently asked questions
Can I take my key person policy with me when I sell my business?
Usually yes. The company can transfer the policy to you, the insured, which is an exception to the transfer-for-value rule. The value of the policy may be taxable to you when transferred, so plan it with your CPA.
Does the buyer have to keep our life insurance policies?
No. Policies are handled like any other asset in the deal. The purchase agreement should say whether each policy stays, transfers to the insured, or is surrendered.
What is a reportable policy sale?
A rule added in 2017 tax legislation (effective for 2018 onward) covering acquisitions of life insurance policies, or interests in entities that hold them, by buyers without a substantial family, business or financial relationship to the insured. It can make part of the death benefit taxable and requires information reporting under Section 6050Y. Regulations exclude some business acquisitions.
Start your life insurance request
Tell us what the coverage is for and who it would cover. For most requests we ask for each person's date of birth and sex so Erik can prepare for the call. We do not ask health or tobacco questions in this initial request. This is a request for help, not an insurance application or a promise of coverage.
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.