Cross Purchase Buy-Sell Agreement Life Insurance
One version, called a “cross-purchase buy-sell agreement” is the most popular buy-sell life insurance structure for a small corporation with no more than four owners.
Reason being, a cross-purchase agreement requires each owner to buy an individual policy on each of their partners. The amount of life insurance is equal to their respective share of the net worth of the business. A corporation with just four owners would need a total of 12 life insurance policies, each owner would buy a policy on the other three partners (3 x 4 = 12).
Each owner will be beneficiary, payor, and owner of each policy they purchase on the lives of the other business owners. It provides a clear outline of how the deceased owner’s heirs will sell their interest to the remaining owner(s) with the insurance proceeds. One of the benefits of this type of buy/sell agreement, is the family of the deceased owner’s tax basis will be equal to the fair market value at time date of death, making for favorable tax treatment on the death proceeds.