Cross Purchase Plan
What Does Cross Purchase Plan Mean?
A cross purchase plan is a legally binding agreement that enables partners in a business to buy out another partner’s shares in the event of that partner’s death, incapacitation, or retirement. This plan outlines the division and purchase of shares and is crucial for business continuity planning. In the context of insurance, partners typically use the proceeds from a life insurance policy to purchase the shares of a deceased or departing partner. Partners setting up one of these plans have to decide between term or permanent life insurance, with the trade-off coming down to cheaper premiums now versus coverage that stays in place for as long as the partnership lasts.
Insuranceopedia Explains Cross Purchase Plan
A cross purchase plan provides an opportunity for shares to become unexpectedly available, such as in the event of a partner’s death. As a result, partners may purchase life insurance policies for each other, naming themselves as beneficiaries. Keeping those designations current matters, since common life insurance beneficiary mistakes can leave the buyout unfunded if the wrong person is still listed when a partner dies. Upon the death of one partner, the surviving partner can use the proceeds from the policy to buy the deceased’s original shares. The price for these shares may be specified as a fixed dollar amount or determined by a formula outlined in the cross purchase plan.
