Which arrangement is used when the corporation buys one policy on each shareholder?

Which arrangement is used when the corporation buys one policy on each shareholder?

• A. Executive bonus
• B. Stock purchase
• C. Term life insurance
• D. Entity purchase

Answer: (B)

The concept being tested is how buy-sell funding works when a corporation takes responsibility for a shareholder buyout. In a stock purchase arrangement, the corporation owns life insurance policies on the lives of the shareholders. When a shareholder dies, the death benefit goes to the corporation, which uses those funds to buy the deceased person’s shares from the estate or heirs. This setup ensures liquidity to complete the buyout and keeps ownership within the company. This differs from an executive bonus, where the company pays premiums on a policy owned by the employee as a bonus; it also differs from cross-purchase, where each shareholder owns policies on the others’ lives and survivors use death benefits to buy the deceased’s shares. The term “stock purchase” specifically describes the corporate-owned policy approach described in the question.

The concept being tested is how buy-sell funding works when a corporation takes responsibility for a shareholder buyout. In a stock purchase arrangement, the corporation owns life insurance policies on the lives of the shareholders. When a shareholder dies, the death benefit goes to the corporation, which uses those funds to buy the deceased person’s shares from the estate or heirs. This setup ensures liquidity to complete the buyout and keeps ownership within the company.

This differs from an executive bonus, where the company pays premiums on a policy owned by the employee as a bonus; it also differs from cross-purchase, where each shareholder owns policies on the others’ lives and survivors use death benefits to buy the deceased’s shares. The term “stock purchase” specifically describes the corporate-owned policy approach described in the question.