Buy-Sell Life Insurance
Cross Purchase Plan
Each owner of the business buys life insurance, the other party or business owner is the beneficiary of the insurance proceeds and is therefore paying the yearly premiums.
The insurance proceeds are then used by the beneficiary upon passing to buy out the shares of the company at a pre-determined price in the buy-sell life insurance agreement.
Buy-Sell Example:
Two business owners (person A) and (person B) enter a cross purchase buy-sell life insurance agreement. As a result, each person purchases life insurance policies for each other.
The beneficiary for (Person A) life insurance is (Person B) who also pays the yearly insurance premium and the same in reverse for (Person B) and (Person A).
If (Person A) passes away, their ownership of the business will be transferred to Person B at a predetermined price in the buy-sell cross purchase agreement.
Entity Purchase or Stock Redemption Plan
The business buys life insurance policies on the lives of each owner or shareholder of the business, in return, each employee owner or stockholder enters into an entity purchase agreement with the business to sell their stock upon the passing of the employee owner.
Since the business is the owner of the insurance policy, the business will pay the insurance premiums and now is the owner and beneficiary of the insurance policy with the employee owner or shareholder being named the insured.
Upon passing of the employee, the business will use the insurance proceeds to purchase the employees shares in the business from the employee’s estate.