What type of buy-sell agreement involves partners purchasing insurance on each other?

In the context of business partnerships, a cross-purchase plan is a type of buy-sell agreement where partners agree to purchase insurance policies on each other's lives. This arrangement allows the remaining partners to use the death benefit from the policy to buy the deceased partner's share of the business. This ensures that the business can continue operating smoothly after the loss of a partner and provides financial security to the deceased partner’s beneficiaries.

In a cross-purchase plan, each partner is responsible for their own insurance policy, and therefore, the financial responsibility aligns with each partner's stake in the business. This type of agreement can ultimately lead to better control over ownership transfer and continuity in the business operations, as the remaining partners are directly purchasing their deceased partner's share.

This contrasts with an entity-purchase plan, where the business itself buys a single policy on each partner's life, and then uses the death benefit to buy back the shares from the deceased partner's estate. Understanding the structure and benefits of each type of buy-sell agreement is vital for partners when planning for potential future changes in ownership.