California Life-Only & Accident and Health AgentLife InsuranceMedium
A business owner establishes a buy-sell agreement funded by life insurance. The agreement states that upon the death of one partner, the surviving partners will use the life insurance proceeds to purchase the deceased partner's share of the business from their estate. Which type of buy-sell agreement is this?
- AEntity Purchase Agreement
- BDeferred Compensation Agreement
- CStock Redemption Agreement
- DCross-Purchase Agreement
Show answer & explanationAnswer & explanation
Correct answer: D. Cross-Purchase Agreement
In a Cross-Purchase Agreement, each partner owns a policy on the other partners. Upon a partner's death, the surviving partners use the death benefit from the policies they own to buy the deceased partner's share from their estate.
Why the other options are wrong
- A. An Entity Purchase Agreement (or Stock Redemption) has the business itself own the policies and purchase the deceased partner's share.
- B. A Deferred Compensation Agreement is an arrangement where an employee agrees to defer a portion of their income until a later date, unrelated to buy-sell agreements.
- C. A Stock Redemption Agreement is essentially an Entity Purchase Agreement, where the corporation buys back the stock.
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 the death of an owner, the surviving owners use the policy proceeds to buy the deceased owner's interest from their estate.
- Each owner insures the other owners.
- Surviving owners are beneficiaries of the policies they own.
- Proceeds are used to buy the deceased's share from their estate.
- Ensures smooth transfer of business ownership.
Memory trick: Cross-Purchase: Each partner crosses insurers the others.