Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceMedium
A business owner establishes a buy-sell agreement funded by life insurance for three partners. Each partner owns a policy on the lives of the other two partners. Upon the death of one partner, the surviving partners use the death benefit to purchase the deceased partner's share. What type of buy-sell agreement is this?
- ACross-Purchase Plan
- BDeferred Compensation Plan
- CEntity Purchase Plan
- DStock Redemption Plan
Show answer & explanationAnswer & explanation
Correct answer: A. Cross-Purchase Plan
In a Cross-Purchase Plan, each owner buys a policy on the other owners. When an owner dies, the surviving owners use the death benefits to buy the deceased owner's interest from their estate.
Why the other options are wrong
- B. A Deferred Compensation Plan is a retirement savings plan, not a buy-sell agreement.
- C. An Entity Purchase Plan involves the business itself owning the policies and purchasing the deceased owner's share.
- D. A Stock Redemption Plan (or Entity Purchase Plan) involves the business entity owning the policies and buying back the shares.
Cross-Purchase Buy-Sell Agreement
A type of buy-sell agreement where each business owner purchases a life insurance policy on the other owners to fund the purchase of a deceased owner's share.
- Owners buy policies on each other
- Surviving owners use death benefit to buy shares
- Often used with a small number of partners
- Can result in many policies for larger groups
Memory trick: Buy-sell: Who buys, who sells, when a partner leaves.