What characterizes a cross-purchase buy-sell agreement?

A cross-purchase buy-sell agreement is designed for situations where individual partners or owners of a business agree to buy insurance on each other's lives. This arrangement ensures that, in the event of a partner's death, the surviving partners have the necessary funds to purchase the deceased partner's interest in the business directly from their heirs. This approach allows each partner to have a stake in the insurance policy and to be financially prepared for the transition of ownership.

Under this agreement, each partner independently owns a policy on the life of each of the others, making it a personalized and direct method for succession planning in a partnership. This structure is significant because it keeps the ownership shares within the remaining partners and helps maintain the stability of the business.

In contrast to other choices, the agreement does not involve the business purchasing insurance on behalf of the owners collectively, nor does it posit that only one partner is responsible for payments, which can lead to complications if that partner faces financial difficulty. Lastly, the option concerning insurance premiums being paid from the company's profits does not accurately represent the specifics of a cross-purchase structure, which emphasizes individual ownership and responsibility for policies.