A funding mechanism is the method used to provide cash for an obligation such as premiums, buy-sell redemptions, or estate taxes. Options include current cash flow, sinking funds, loans or credit lines, and life insurance. The choice balances timing certainty, cost, tax treatment, governance,and the ability to perform under stress.

Advisors compare current cash, loans, sinking funds, and insurance to fund obligations. For estate taxes or buy-sell agreements, life insurance often provides the most certain liquidity when needed.