Thompson Coburn LLP wrote an excellent article on how life insurance can be a valuable asset for business owners and how it can be used to fund a purchase on death of a member of an LLC under a Buy Sell Agreement.  The article starts with:

Life insurance is an effective tool that business owners can use to provide liquidity at their passing for both their businesses and their families. Having a properly drafted buy-sell agreement is key to avoiding conflict and memorializing how life insurance proceeds are to be used at the death of a business owner.

When life insurance is used to provide liquidity for the purchase of a deceased owner’s interest, such purchase can be structured as a redemption, a cross purchase by the surviving owners, or hybrid of the two. In addition, an insurance limited liability company can also be used to maximize creditor protection and other tax benefits.”

The article concludes by saying that a properly drafted buy-sell agreement “is critical in order to maximize the benefits of utilizing life insurance proceeds to purchase a deceased business owner’s interests.”