Cross-Purchase Agreement Funding
In a cross-purchase arrangement, business owners may buy life insurance on each other so surviving owners have funds to purchase the deceased owner’s share.
How this coverage works
Each owner buys and owns a policy on each of the others. When one dies, the survivors receive benefits personally and use them to buy the deceased owner’s share.
With two owners that is two policies. With five it is twenty. The arithmetic is what usually decides between this and an entity-purchase structure.
Who this coverage may be good for
- Businesses with a small number of owners.
- Partnerships where owners want to hold the policies personally.
What to consider before choosing it
- It gets complicated quickly as owners are added.
- Each owner must be able to afford premiums on every other owner.
- Legal and tax guidance is not optional here.
Common questions
How many policies do we need?
Each owner insures every other owner, so n owners means n times n minus one policies. Four owners is twelve policies. That is the practical ceiling for most businesses.
Why choose this over entity-purchase?
Tax treatment of the surviving owners’ basis often differs. That difference is real and it is a question for your accountant.
What if an owner becomes uninsurable?
It becomes a problem, which is why these arrangements should be put in place while everyone is healthy and reviewed as the ownership changes.
Coverage availability, benefits, riders, and underwriting requirements vary by carrier, product, state, and individual eligibility. This page is for general educational purposes and is not a guarantee of coverage.