Which statement best contrasts cross-purchase and entity plans?

• A. Cross purchase is common in small partnerships; each partner buys policies on others
• B. Entity purchase is common in small partnerships
• C. Both are used only for corporations
• D. Cross purchase reduces the death benefit

Answer: (A)

In a buy-sell setup, cross-purchase plans have each owner purchasing life insurance on the others, which works well in a small partnership where surviving partners use the death benefits to buy out the deceased partner’s share. This means the policies are owned by the individuals themselves, and the death benefit goes to the buyers to fund the buyout. Entity plans, by contrast, put the business itself as owner and beneficiary of the policies on the owners, with the death benefit used to purchase the deceased owner’s interest from the heirs. The statement that cross purchase is common in small partnerships, with each partner buying policies on the others, captures this key difference. The other options misstate who owns the policies or when these plans are used, and they also incorrectly imply that cross-purchase alters the death benefit.