Probably yes — if the business has grown since you bought the policies and nobody has re-matched the death benefit to today’s value. A buy-sell obligates a sale at the current price, but the life insurance funding it was sized to an older, smaller number. That difference is a buy-sell coverage gap, and it lands on the surviving owner as debt at the worst possible moment.
Most warnings about buy-sell agreements are aimed at the owner who never got around to one. This is a warning for the owner who did everything right. You sat down with a good attorney and a good agent some years ago, you signed a real agreement, and you bought real life insurance to fund it. On the day you signed, the numbers matched: the business was worth a certain amount, each owner’s share was worth its slice of that, and the policies were written for exactly that slice. Then the whole thing went into a drawer, a safe deposit box, or a folder on someone’s drive — and it has been sitting there, unchanged, ever since.
Here is the uncomfortable part. That belief that the problem is handled is the exposure. A buy-sell isn’t a transaction you complete once; it is a relationship between two numbers that both move over time — the value of the business, and the size of the death benefit that’s supposed to fund the buyout. They were equal on signing day. Nobody was ever put in charge of keeping them equal. So they drift apart, quietly, in the one direction that hurts, and the gap only becomes visible at a death — which is exactly when there is no time left to fix it. In our experience, this underfunded-but-technically-funded plan is the single most common breed of buy-sell agreement out there.
This is the practitioner’s walk-through of how a plan that was correct at signing goes wrong on its own, what the gap actually costs the people you were trying to protect, and the sixty-minute self-audit that tells you whether yours has drifted. The legal drafting still belongs to your attorney and the tax treatment to your CPA. The funding — making sure the money still matches the obligation — is our lane, and it is the part almost nobody comes back to check.
Quick Reference
The Underfunded Buy-Sell, in Brief
The at-risk owner isn’t the one with no plan — it’s the one who thinks the plan is finished and stopped looking.
A buy-sell is two moving numbers — the business’s value and the death benefit funding the buyout. They match on day one; nobody owns keeping them matched.
Three ordinary forces open the gap — the business grows, the death benefit is fixed, and no advisor was ever assigned the reconciliation.
The obligation is enforceable whether or not the cash exists — an underfunded agreement turns the shortfall into debt on the surviving owner.
The fix is a scheduled review, not a cheaper policy — check one number against today’s value, and decide who owns that check going forward.
Practitioner Take
A Buy-Sell Isn’t a Transaction. It’s a Number You Maintain.
After more than two decades placing and reviewing these arrangements, we can tell you the plans that fail are almost never the ones that were drafted badly. They’re the ones that were done well — and then treated as permanent. The failure mode here isn’t bad initial work; it’s good initial work nobody ever revisited. Three things are worth holding onto.
The gap is the default, not a mistake. Nobody makes an error. The business grows the way everyone hoped, a level death benefit stays exactly where it was written, and the two numbers separate all on their own. Left alone, an underfunded buy-sell is simply what a funded one becomes.
The foil is the set-and-forget habit, not any advisor. The attorney drafted it and did their job. The agent placed the coverage and did theirs. The CPA reports on the business but was never hired to reconcile the buy-sell math. The reconciliation just has no owner — that’s a blind spot in the process, not a failing of anyone in it.
“Buy more term” doesn’t solve a moving target. A single flat number, term or permanent, is a static answer to an obligation that keeps climbing. The real fix is building the review into the plan and matching the kind of coverage to a value that moves — not picking a cheaper number and freezing it again.
None of this is complicated once someone walks it with you. It just rarely gets walked, because the review that catches it is nobody’s favorite task — right up until it’s the only thing that would have mattered. That review is exactly the part we make sure is real.
The Plan That Passed, Then Quietly Failed
Picture the owner who did it all correctly. Five years ago they sat down with an attorney and an agent, established what the business was worth, signed an agreement that obligated a clean buyout if one of them died, and bought life insurance sized to exactly that obligation. They walked out believing the problem was solved — a one-time transaction, checked off, filed away. And on that day, they were completely right.
The trouble is that a buy-sell is not a transaction; it is a promise that has to keep matching a number, and the number won’t hold still. Think of it the way you’d think of a prenup: one you signed and then quietly tore up as your assets tripled wouldn’t protect anyone. A buy-sell whose funding froze on day one is in the same position. It looks like protection, it feels like protection, but the coverage stopped tracking the thing it was meant to cover. A plan that’s never revisited is, functionally, the same as no plan — just with a false sense of security bolted on top. This is a close cousin of the problem we walk through in what happens to your business if your partner dies, except here the agreement exists and everyone believed it was complete.
Why the Gap Opens: Three Forces, One Direction
The underfunding isn’t anyone’s blunder. It is the default outcome of three ordinary forces, and all three push the same way.
The business grows. Revenue, margins, and enterprise value climb — that’s the entire goal of owning the thing. But every dollar of growth widens the distance between what each owner’s interest is now worth and what the plan was built to buy.
The death benefit is fixed. Most buy-sell coverage we have ever looked at was written as level term, and a level policy’s face amount does not grow just because the company did. The two million dollars written years ago is still two million dollars; it has no idea the business doubled.
Nobody’s job is to reconcile them. This is the one that does the real damage. The attorney drafted and moved on. The agent placed the policy and moved on. The CPA sees the business every year but wasn’t engaged to check the buy-sell math against the current valuation. So the two numbers drift apart inside a blind spot that has no owner. There’s no schedule and no accountability once the binder closes.
The result is a coverage gap that grows a little every year, invisibly, in the one direction that hurts — and it only becomes visible at a death, which is precisely when there’s no runway left to correct it. The honest comparison is a dental cleaning you fall out of the habit of: you don’t decide to skip it forever, you just miss one, then it’s hard to reschedule, and the next time you’re in the chair it’s an emergency instead of a checkup. Nobody signs a buy-sell intending to never look at it again. It simply happens.
Alex and Morgan: Watch the Gap Open
The cleanest way to see this is to walk a simple example slowly. Alex and Morgan each own half of a business. At signing, it’s worth four million dollars, so each owner’s interest is worth two million. They do everything right: a coordinated agreement, a current valuation, and a correctly owned two-million-dollar life insurance policy on each of them. If either dies, that policy pays two million, the surviving owner completes the buyout, and the deceased owner’s spouse receives two million in cash on a clean timeline — no new debt, no working-capital crisis, no negotiation with a grieving family. This is the plan working exactly as designed. Hold it there for a second, because it really is good.
Now let time pass. The business does what everyone hoped and grows from four million to eight million. Each owner’s interest is now worth four million dollars. But nobody updated the valuation, and nobody increased the coverage — the policy on each owner is still two million. Then Alex dies. The policy pays its two million promptly and tax-efficiently, exactly as promised. The problem isn’t the policy; it did its job. The problem is that the obligation is now four million. Morgan has half of what the agreement requires.
So two million arrives and funds half the buyout. The other two million has no funding behind it. Morgan — or the business — now owes Alex’s spouse two million dollars with no cash set aside for it, which is the exact “agreement exists but isn’t funded” scenario, except it showed up inside a plan everyone believed was complete. The usual fallback is an installment note, say two hundred thousand dollars a year for ten years. Now Alex’s spouse is carrying a decade of counterparty and business-performance risk, and Morgan is carrying a decade of debt service stacked on top of running the company. The plan that was “funded” silently became the half-funded one. Here are the same two owners in three states.
State of the plan
Business value
Interest to buy
Policy face
Funded by insurance
Shortfall lands as
Signing day
$4M
$2M
$2M
100%
—
Five years on, unreviewed
$8M
$4M
$2M
50%
$2M installment note on the survivor
Five years on, reviewed
$8M
$4M
$4M
100%
—
Illustrative hypothetical, not a projection of any specific policy or business. Figures are round numbers chosen to show the mechanism.
The difference between the middle row and the last row is not a smarter product or a better agent. It is one review that got scheduled. That’s the whole ballgame — and it’s the picture in the chart below.
TIPB Analysis
The gap you’re accruing: rising value vs. a flat death benefit
Each owner’s interest climbs with the business; a level policy stays put. The shaded wedge is the shortfall.
$0$1M$2M$3M$4Mthe shortfall you’re accruingfunded 100%funded 50%Year 0Year 3Year 6Years since the plan was signedInterest to be boughtDeath benefit funding it
Illustrative. A straight-line growth path is a simplification chosen to show the direction of the gap, not a forecast of any business or policy.
Where Life Insurance Actually Fits
This is the honest place to talk about the product, because the example earned it. Life insurance is uniquely good at the death-trigger buyout for one reason: the money is certain, and it’s timed to the event. It does not care what the operating account looks like the month an owner dies. Nothing else on the funding menu — company cash, a bank line, a seller note, an asset sale — can promise the exact amount, on the exact day, regardless of the company’s condition at that moment. Securities and other assets have their place in a business owner’s broader plan; what they cannot do is guarantee a specific sum lands on an unpredictable date. That’s the job life insurance was built for.
But the whole thesis of this piece is that the tool only works if it’s maintained, so the practitioner content is really three coordination questions most owners never ask after the policy is placed. First, does the face amount still equal the interest it’s supposed to buy — at today’s value, not the value on the policy’s issue date? That single question closes the Alex-and-Morgan gap. Second, is the policy contractually tied to the buyout obligation, or is it just sitting on the books near it? Coverage the agreement doesn’t actually require to be used for the buyout can get redirected to something else entirely once the person who understood the plan is gone. Third, what happens to the policy if an owner leaves alive — retires, sells out, gets bought out? A death-funding policy with no plan for a living exit is a loose end that turns into a transfer-for-value problem or an ownership mess later. If you want the mechanics of who should own which policy under each structure, we lay them out in cross-purchase vs. entity: which structure and how to fund it.
“We’ll Just Buy More Term, Then”
This is the obvious objection, and it deserves an honest answer rather than a brush-off. To be clear up front, this is not an anti-term episode or an anti-term post — term insurance is a legitimate, low-cost tool, and it can absolutely be part of a well-maintained buy-sell. In fact, one smart move at inception is to buy term for more than the current valuation on purpose, giving yourself headroom for a few years of expected growth so you’re not underfunded the moment the ink dries. There’s an upper limit — you can’t insure a two-million-dollar business for twenty million on optimism — but you can reasonably cover ahead of where you are.
The catch is that a single flat number, bought once and left alone, is a static answer to a moving target. For a business that keeps growing, you size the term to today, the company keeps climbing, and you’re underfunded again in a few years — only now you’re re-buying coverage at older ages and whatever health you have then, which may be a very different conversation with the underwriter. The maintenance problem doesn’t disappear because you picked a cheaper flat number; it disappears when you build the review into the plan and match the kind of coverage to a value that keeps moving. That’s the honest case for coverage designed to be increased, or for permanent cash value that can grow alongside the obligation and also fund a lifetime buyout at retirement or disability — not as a magic product, but as the structure that doesn’t send you back to the underwriting desk every time you succeed. The failure isn’t term versus permanent. The failure is treating any one-time number as finished.
Don’t let “it came back expensive” become “so we skipped it.” Once a buy-sell is signed, it creates a real, enforceable obligation to buy. If a partner’s coverage comes back priced higher than expected — an older owner beside a younger one, or, in a case we still remember, a partner whose deep-scuba hobby earned a five-figure flat extra — the temptation is to walk away from funding it. That’s the worst possible response to a promise you’ve already made. As Brantley put it on the episode: if you think the life insurance is expensive, wait until one of you dies. If someone is genuinely hard to insure, the answer is to plan around it — set money aside deliberately, or use a multi-life approach when there are enough partners — not to leave the obligation naked.
The Sixty-Minute Self-Audit
Here’s what an owner can actually go do tonight, without calling anyone first. It takes about an hour, and it produces a single number that tells you whether your plan has drifted.
Find the agreement and read the valuation clause. What number — or what method — does it use to set the buyout price, and when was that number or method last touched?
Find your current business value. Not the founding-year figure. If you don’t have anything recent, that absence is itself a finding.
Find the death benefit on each buy-sell policy. One number per insured owner.
Compare them. Does the face amount still equal the interest it’s meant to buy at today’s value? If it falls short, the gap is the amount your surviving partner would have to finance out of pocket — write that dollar figure down, because that’s the real stake.
Decide who owns the reconciliation going forward. Someone needs to run this check on a set schedule — every year, every couple of years, whatever the partners agree to. If the honest answer to “who owns it?” is “no one,” that’s the actual problem, and it’s fixable in a single meeting.
If any of those first four steps can’t be answered inside an hour, the plan is already drifting. That’s not a crisis — it’s a review. And it’s exactly the kind of conversation worth having before a trigger forces it. For the broader picture of how a buy-sell fits alongside the other liquidity problems an owner faces, our guide to cash value life insurance for business owners works a full example, and the buy-sell overview covers the other triggers — disability, divorce, retirement, deadlock — that this piece deliberately set aside to stay on the death-benefit-funding question.