Buy-sell agreements: cross-purchase vs entity purchase
A buy-sell agreement funded with life insurance lets the business or its owners buy a deceased owner's interest. In a cross-purchase plan each owner insures every other owner, so the plan needs n × (n − 1) policies; in an entity purchase the business owns one policy on each owner.
Key facts for the exam
- Cross-purchase: each partner owns a policy on every other partner, so 3 partners need 3 × 2 = 6 policies.
- With 4 equal partners, a cross-purchase plan needs 4 × 3 = 12 policies.
- Each owner uses the proceeds to buy the deceased owner's share from the estate.
- Entity purchase (stock redemption): the business is owner, payer and beneficiary of one policy on each owner and redeems the deceased owner's interest.
- Key person insurance is a different arrangement: it compensates the business for the loss of a key employee, including lost profits and the cost of a successor.
The trap. Count the policies: cross-purchase needs n × (n − 1), entity purchase needs n. Key person insurance does not buy anyone's share.
How the exam asks about it
- In a business partnership with 3 partners, how many separate life insurance policies are required to fund a cross-purchase buy-sell agreement?
- Four equal partners fund a cross-purchase buy-sell agreement with individual life policies. How many policies are required?
- How does a cross-purchase buy-sell agreement use life insurance?
- A closely held corporation funds a buy-sell agreement so that the company itself buys a deceased shareholder's stock. What is this plan called?
- How does an entity-purchase buy-sell plan differ from a cross-purchase buy-sell plan in a multi-owner corporation?
- A company insures its chief engineer, paying the premiums and naming itself beneficiary. What is the purpose of that arrangement?
Where it sits on your state's exam
| State exam | Share of exam | ≈ Scored questions | Outline section |
|---|---|---|---|
| Texas | 10% | 8 of 80 | Retirement and Other Insurance Concepts |
| Florida | 9% | 8 of 85 | Retirement and Other Insurance Concepts |
| Georgia | 10% | 8 of 80 | Retirement and Other Insurance Concepts |
| New York | 19% | 19 of 100 | Life Insurance Basics |