Cross-Purchase or Entity-Purchase: How Life Insurance Funds a Buy-Sell Agreement
When a buy-sell agreement promises a marketable, cash-funded buyout, life insurance is a common funding source. There are two ways to structure it, and the choice affects ownership, premiums, and how the plan behaves as the business changes.
Entity-Purchase (Redemption)
In an entity-purchase arrangement, the company is the buyer. The company owns life insurance policies on each owner, pays the premiums, and uses the proceeds to purchase a deceased owner's shares from their family or estate.
It is often the simpler structure administratively: fewer policies, one payer, and one transaction at the time of a buyout.
Cross-Purchase
In a cross-purchase arrangement, the owners themselves are the buyers. Each owner owns and pays for a policy on every other owner. When an owner dies, the remaining owners use the proceeds to purchase the deceased owner's shares directly.
Ownership of the business stays with the owners, which some owners and their attorneys prefer from an estate-planning standpoint.
How the Two Structures Compare
| Consideration | Entity-Purchase | Cross-Purchase |
|---|---|---|
| Who is obligated to purchase the departing owner's interest | The company itself | The remaining owners, individually |
| Who owns the life insurance policies | The company | The owners, on each other |
| Who pays the premiums | The company | Each owner, out of personal funds |
| How many policies are needed | One per owner | One for every pair of owners — three owners means six policies |
| What happens to ownership when a buyout occurs | Shares return to the company | Shares transfer directly to the remaining owners |
| How new owners are added | The company insures the new owner | Each new owner requires a new set of policies with every other owner |
This comparison is educational and simplified. Ownership, tax, and estate considerations depend on the specific facts. Discuss tax treatment with a CPA and drafting questions with an attorney.
Neither Structure Is Automatically Better
- How many owners are there, and how often does ownership change?
- Do the owners have the personal cash flow to fund cross-purchase premiums?
- Do the owners' estate plans favor shares passing between owners or back to the company?
- Does the agreement's valuation language match the funding structure?
- Are existing policies actually owned by the party the agreement assumes?
- Have premiums and coverage amounts kept pace with the company's value?
The structure only matters if the value, the obligation, and the funding actually line up.
We Review the Plan Behind the Agreement
Buy Sell Advisory reviews whether the financial plan behind a buy-sell agreement can actually work: whether the business value is current, whether the purchase obligation is clear, whether existing funding is sufficient, and whether the funding structure matches what the agreement assumes. Findings are organized for the advisory team to act on.
If the funding behind an agreement needs to change, we help evaluate the options and coordinate the change with the attorney and CPA on the team. We are a collaborative resource alongside the existing advisory team.
Frequently Asked Questions
Short answers to what owners and advisors most often ask. Your own facts will change the answers — take them to the attorney and CPA on your team.
What is the difference between cross-purchase and entity-purchase funding?+
In an entity-purchase (redemption) arrangement, the company is the buyer: it owns policies on each owner and uses the proceeds to buy back a deceased owner's shares. In a cross-purchase arrangement, the owners are the buyers: each owns a policy on every other owner and uses the proceeds to purchase those shares directly.
How many life insurance policies does each structure require?+
Entity-purchase generally requires one policy per owner. Cross-purchase requires one policy for every pair of owners — two owners need two policies, three owners need six, and the count rises quickly from there.
Who pays the premiums?+
In entity-purchase, the company pays premiums as a company expense. In cross-purchase, each owner pays personally out of their own cash flow. How premium payments are treated is a question for the CPA.
Which structure works better as the number of owners grows?+
Cross-purchase adds a new set of policies every time an owner is added, so it becomes more administrative as ownership grows or changes. Entity-purchase keeps the count at one policy per owner, which is why it is often the simpler structure where ownership changes frequently. Which one fits depends on the owners' plans, and on whether the agreement's valuation language matches the funding.
Can a business switch from one structure to the other?+
It can be done, but it is not a paperwork change. Moving between structures can involve transferring or replacing policies, redrafting the agreement, and tax consequences that the CPA and attorney should review before anything is moved.
Don't Wait for a Triggering Event to Find the Problem.
If your business has a buy-sell agreement, operating agreement, shareholder agreement, or partnership agreement containing buy-sell provisions, review the financial assumptions before they are tested.
- 01Request a Buy-Sell Review
- 02Gather basic information
- 03Identify valuation, agreement & funding gaps
- 04Determine appropriate next steps
- 05Recommendation only when appropriate