Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceHard
A business owner establishes a buy-sell agreement funded by life insurance. The agreement specifies that upon the death of one partner, the surviving partners will purchase the deceased partner's share of the business. Which type of buy-sell agreement is this?
- AStock Redemption Plan
- BCross-Purchase Plan
- CKey Person Plan
- DEntity Purchase Plan
Show answer & explanationAnswer & explanation
Correct answer: B. Cross-Purchase Plan
A Cross-Purchase Plan is a type of buy-sell agreement where each partner (or shareholder) individually owns a life insurance policy on the other partners. Upon the death of a partner, the surviving partners use the death benefit from the policies they own to purchase the deceased partner's interest from their estate.
Why the other options are wrong
- A. This is another name for an Entity Purchase Plan, where the corporation buys back its own stock.
- C. A Key Person Plan is designed to indemnify the business for the loss of a valuable employee, not to fund a buy-sell agreement for owners.
- D. In an Entity Purchase Plan (or Stock Redemption Plan), the business itself owns the policies and buys the deceased partner's share.
Cross-Purchase Buy-Sell Agreement
A type of buy-sell agreement where each business owner purchases a life insurance policy on the other owners. Upon an owner's death, the surviving owners use the policy proceeds to buy the deceased owner's interest from their estate.
- Each owner insures the others
- Surviving owners become the buyers
- Death benefits are income tax-free to the surviving owners (as beneficiaries)
- Can become complex with many owners due to the number of policies required
Memory trick: Buy-sell: 'Cross' between partners, 'Entity' by the company.