What is key person insurance and a buy-and-sell agreement?
Key person insurance is a policy the business owns on a person it can't afford to lose. If that person dies, the payout goes to the business itself — money to replace scarce skills, settle business debt and steady the cash flow while the company finds its feet.
A buy-and-sell agreement solves a different problem: who owns the business afterwards. Co-owners hold policies on each other, paired with a signed agreement, so the survivors buy the deceased's share at an agreed value — and the family gets cash instead of a stake in a business they don't run.
Two problems, two structures
When someone central to a business dies, two separate things break at once. The business loses the person's contribution — the sales they closed, the licence they held, the relationships that ran through them. And the ownership goes somewhere: the deceased's share becomes part of their estate and passes to their heirs.
Key person cover addresses the first problem. A buy-and-sell arrangement addresses the second. They look similar — both are life policies connected to a business — but they point in opposite directions.
Key person cover: the business insures its engine
The structure is simple: the business is the policyholder, the business pays the premiums, and the business receives the proceeds. The life insured is the person whose death would cost it money — a founder, a rainmaker, the one person holding a key qualification or relationship.
The payout buys the business time. Typically it goes towards:
- Recruiting and training a replacement for the skills that walked out the door
- Settling or reducing business debt that was banked on that person's earning power
- Steadying cash flow while customers, suppliers and staff regain confidence
Buy-and-sell: the ownership handshake, funded
In a buy-and-sell arrangement, the co-owners insure each other: each holds a policy on the lives of the others. Alongside the policies sits a signed agreement that fixes the value of the business — or the formula for calculating it — and binds both sides: on death, the survivors buy the deceased's share, and the estate sells it.
The policy supplies the money; the agreement supplies the obligation. When an owner dies, the proceeds pay out to the surviving owners, who use them to buy the share at the agreed value. The survivors keep control of the business they actually run. The family walks away with cash, at a price that was settled while everyone was alive and on good terms.
What happens without one
Without a funded agreement, the deceased's share simply lands in the estate and passes to the heirs. That can mean a grieving spouse holding a stake in a business they never worked in — co-owning with partners who didn't choose them, and who may not be able to afford to buy them out.
Valuation is where it usually turns sour: the family has every reason to see the share as valuable, the surviving owners every reason to see it as modest, and no signed number to settle it. The wider mechanics of what stalls when an owner dies — frozen accounts, signing power, suretyships — are covered in "What happens to a small business when the owner dies?"
The estate-duty footnote
Life policy proceeds are generally counted as property in the deceased's estate for estate duty — which runs at 20% of the dutiable estate above the R3.5 million abatement, and 25% on the portion above R30 million.
A correctly structured buy-and-sell policy is a recognised exception: where the arrangement genuinely meets the requirements, the proceeds can fall outside the deceased's estate for estate-duty purposes. The word doing the work is 'correctly' — who owns the policy, who pays the premiums and what the agreement says all affect the treatment.
The agreement is the half people skip
A policy without a signed agreement is money without an obligation — the proceeds pay out, but nothing compels anyone to sell or to buy. An agreement without a policy is an obligation without money — the survivors are bound to buy a share they can't afford. The arrangement only works as a pair: the signature and the funding, matched to the same value, kept current as the business grows.
Terms used on this page
- key person insurance
- A policy a business owns on the life of someone whose loss would cost it money. The business pays the premiums and receives the payout — to replace skills, settle business debt or steady cash flow.
- buy-and-sell agreement
- A signed agreement between co-owners, funded by life policies they hold on each other, that binds the survivors to buy a deceased owner's share at an agreed value — so the family gets cash instead of an illiquid stake.
Reviewed July 2026