Cross purchase agreements are typically used in which context?

• A. agreements are typically used by larger organizations
• B. agreements are typically used by small partnerships, in this type, each partner purchases a policy on the life of every other partner
• C. The company purchases policies on the lives of all partners
• D. There is no life insurance involved in cross-purchase agreements

Answer: (B)

Cross-purchase agreements involve each partner purchasing life insurance on the lives of the other partners. They’re typically used in small partnerships because, with only a few owners, it’s practical for every partner to hold policies on the others. When a partner dies, the death benefits are used to buy the deceased partner’s share from their heirs, helping the remaining partners maintain equal ownership and a smooth transition.

This setup contrasts with an entity-purchase arrangement, where the business itself owns policies on the owners and uses the proceeds to buy the deceased owner’s interest. And, of course, a cross-purchase plan involves life insurance—so stating there’s no life insurance isn’t correct.