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September 9, 2026 \u00b7 Brandon Roberts<\/a><\/p>\n <\/p>\n Short Answer<\/p>\n Probably yes \u2014 if the business has grown since you bought the policies and nobody has re-matched the death benefit to today\u2019s 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<\/strong>, and it lands on the surviving owner as debt at the worst possible moment.<\/p>\n<\/p><\/div>\n 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\u2019s 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\u2019s drive \u2014 and it has been sitting there, unchanged, ever since.<\/p>\n Here is the uncomfortable part. That belief that the problem is handled is the exposure. A buy-sell isn\u2019t a transaction you complete once; it is a relationship between two numbers that both move over time \u2014 the value of the business, and the size of the death benefit that\u2019s 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 \u2014 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.<\/p>\n This is the practitioner\u2019s 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 \u2014 making sure the money still matches the obligation \u2014 is our lane, and it is the part almost nobody comes back to check.<\/p>\n <\/p>\n Quick Reference<\/p>\n <\/p>\n Practitioner Take<\/p>\n 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\u2019re the ones that were done well \u2014 and then treated as permanent. The failure mode here isn\u2019t bad initial work; it\u2019s good initial work nobody ever revisited. Three things are worth holding onto.<\/p>\n None of this is complicated once someone walks it with you. It just rarely gets walked, because the review that catches it is nobody\u2019s favorite task \u2014 right up until it\u2019s the only thing that would have mattered. That review is exactly the part we make sure is real.<\/p>\n<\/p><\/div>\n <\/p>\n 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 \u2014 a one-time transaction, checked off, filed away. And on that day, they were completely right.<\/p>\n 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\u2019t hold still. Think of it the way you\u2019d think of a prenup: one you signed and then quietly tore up as your assets tripled wouldn\u2019t 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\u2019s never revisited is, functionally, the same as no plan \u2014 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<\/a>, except here the agreement exists and everyone believed it was complete.<\/p>\n <\/p>\n The underfunding isn\u2019t anyone\u2019s blunder. It is the default outcome of three ordinary forces, and all three push the same way.<\/p>\n The business grows.<\/strong> Revenue, margins, and enterprise value climb \u2014 that\u2019s the entire goal of owning the thing. But every dollar of growth widens the distance between what each owner\u2019s interest is now worth and what the plan was built to buy.<\/p>\n The death benefit is fixed.<\/strong> Most buy-sell coverage we have ever looked at was written as level term, and a level policy\u2019s 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.<\/p>\n Nobody\u2019s job is to reconcile them.<\/strong> 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\u2019t 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\u2019s no schedule and no accountability once the binder closes.<\/p>\n The result is a coverage gap that grows a little every year, invisibly, in the one direction that hurts \u2014 and it only becomes visible at a death, which is precisely when there\u2019s no runway left to correct it. The honest comparison is a dental cleaning you fall out of the habit of: you don\u2019t decide to skip it forever, you just miss one, then it\u2019s hard to reschedule, and the next time you\u2019re in the chair it\u2019s an emergency instead of a checkup. Nobody signs a buy-sell intending to never look at it again. It simply happens.<\/p>\n <\/p>\n 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\u2019s worth four million dollars, so each owner\u2019s 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\u2019s spouse receives two million in cash on a clean timeline \u2014 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.<\/p>\n Now let time pass. The business does what everyone hoped and grows from four million to eight million. Each owner\u2019s interest is now worth four million dollars. But nobody updated the valuation, and nobody increased the coverage \u2014 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\u2019t the policy; it did its job. The problem is that the obligation is now four million. Morgan has half of what the agreement requires.<\/p>\n So two million arrives and funds half the buyout. The other two million has no funding behind it. Morgan \u2014 or the business \u2014 now owes Alex\u2019s spouse two million dollars with no cash set aside for it, which is the exact \u201cagreement exists but isn\u2019t funded\u201d 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\u2019s 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 \u201cfunded\u201d silently became the half-funded one. Here are the same two owners in three states.<\/p>\nThe Underfunded Buy-Sell, in Brief<\/h3>\n
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A Buy-Sell Isn\u2019t a Transaction. It\u2019s a Number You Maintain.<\/h3>\n
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The Plan That Passed, Then Quietly Failed<\/h2>\n
Why the Gap Opens: Three Forces, One Direction<\/h2>\n
Alex and Morgan: Watch the Gap Open<\/h2>\n