Most shareholder agreements require buying out a deceased partner's shares, often within 60 to 90 days. For a business valued at $2M with two equal partners, that means finding $1M fast — without selling assets, without borrowing at a punitive rate, without forcing the surviving partner into personal debt. Life insurance bought when the agreement is signed, while both partners are healthy, costs a fraction of that amount in annual premiums and delivers the capital within weeks instead of liquidating the business under pressure.
Two structures exist, and the choice changes everything. Criss-cross buy-sell: each partner owns a policy on the other's life, collects the death benefit personally, and buys the shares directly — simple, but every premium is paid with money already taxed in the partner's hands. Corporate redemption: the company owns the policies on each shareholder, collects the death benefit, then redeems the shares from the estate — premiums flow out of the company, often at a lower after-tax cost if it's taxed at the small business rate.
The real economics play out in the capital dividend account (CDA). When a corporation receives a death benefit, the amount exceeding the policy's adjusted cost base credits the CDA — an account that lets the company pay a fully tax-free dividend to shareholders. Structured wrong (wrong owner corporation, poorly designated beneficiary, an agreement that doesn't match the actual structure), that credit can be lost or turn into a taxable dividend to the estate at the worst possible moment.
Three traps show up every time we review an existing agreement: the share valuation hasn't been updated since the policies were bought, so coverage no longer matches real value; the wrong entity has been paying the premium for years without anyone catching it; or a new shareholder joined and the insurance structure was never adjusted. A shareholder agreement without an annual coverage review is, in the end, just an unfunded promise.