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. The agreement specifies that the business itself will purchase the life insurance policies on each owner and will be the beneficiary of those policies. Upon an owner's death, the business uses the death benefit to buy the deceased owner's share. What type of buy-sell agreement is this?
- ACross-Purchase Plan
- BOne-Way Buy-Sell Plan
- CWait-and-See Plan
- DEntity Purchase Plan (Stock Redemption Plan)
Show answer & explanationAnswer & explanation
Correct answer: D. Entity Purchase Plan (Stock Redemption Plan)
In an Entity Purchase Plan (also known as a Stock Redemption Plan), the business itself purchases a life insurance policy on each owner and is named as the beneficiary. Upon an owner's death, the business uses the insurance proceeds to buy back the deceased owner's interest from their estate, ensuring a smooth transfer of ownership.
Why the other options are wrong
- A. In a Cross-Purchase Plan, each owner buys a policy on the other owners, not the business itself.
- B. A One-Way Buy-Sell Plan is typically between a key employee and the business, or one owner and the business, not multiple owners where the business buys all shares.
- C. A Wait-and-See Plan defers the decision of who will buy the shares until after an owner's death.
Entity Purchase Buy-Sell Plan
A type of buy-sell agreement where the business entity itself purchases life insurance policies on each owner, is named as the beneficiary, and uses the death benefit to buy out a deceased owner's interest.
- Business owns the policies
- Business is the beneficiary
- Business pays the premiums
- Business buys the deceased owner's share
- Simpler with many owners than cross-purchase
Memory trick: Entity means the EnTiTy itself buys the life policy.