Tennessee Insurance Practice Exam

In a Cross Purchase Buy-Sell Agreement funded with life insurance, what is required of the partners?

1. They must insure their own lives

2. Each partner must own a policy on the other partners

3. Life insurance policies must be provided by the company

4. Only the main partner needs coverage

The correct answer is: Each partner must own a policy on the other partners

In a Cross Purchase Buy-Sell Agreement, each partner is responsible for purchasing life insurance policies on the lives of their co-partners. This strategy ensures that in the event of a partner's death, the surviving partners can utilize the proceeds from the life insurance policy to buy out the deceased partner's share of the business. This arrangement is crucial for maintaining the stability and continuity of the business since it provides liquid assets to facilitate the buyout without forcing the sale of the business or creating financial complications. The requirement for each partner to own a policy on the other partners ensures that enough funds will be available at the time of death. It is a direct approach, aligning the interests of the partners and providing a clear financial mechanism to handle ownership transition effectively.