In a partnership, which arrangement is used when the partnership buys the policies on the partners?

In a partnership, which arrangement is used when the partnership buys the policies on the partners?

• A. Entity purchase
• B. Stock purchase
• C. Buy-sell agreement
• D. Cross purchase

Answer: (D)

When the partnership itself owns and pays for life insurance on the partners, this is an entity purchase. In this setup, the partnership is the policy owner and beneficiary. If a partner dies, the death benefit goes to the partnership and is used to buy that partner’s interest from the partner’s estate. This keeps funding centralized in the business and simplifies the buyout process, especially as the number of partners grows. Cross-purchase, by contrast, is when each partner buys policies on the other partners and the death benefits go to the surviving partners to purchase the deceased partner’s interest. The description of the partnership owning the policies aligns with an entity purchase, not cross-purchase.

When the partnership itself owns and pays for life insurance on the partners, this is an entity purchase. In this setup, the partnership is the policy owner and beneficiary. If a partner dies, the death benefit goes to the partnership and is used to buy that partner’s interest from the partner’s estate. This keeps funding centralized in the business and simplifies the buyout process, especially as the number of partners grows.

Cross-purchase, by contrast, is when each partner buys policies on the other partners and the death benefits go to the surviving partners to purchase the deceased partner’s interest. The description of the partnership owning the policies aligns with an entity purchase, not cross-purchase.