A ________ plan calls for the business to purchase Life Insurance policies on each of the business owners.

• A. Cross-purchase plan
• B. Entity plan
• C. Group policy plan
• D. Buy-sell plan

Answer: (B)

The main idea here is how a buy-sell arrangement can be funded. When the business owns and pays for life insurance on each owner, with the death benefit used to buy the departing owner’s interest, that setup is called an entity plan. In an entity plan, the company is the policy owner, the premium payer, and the beneficiary, and the proceeds are used to fund the buyout of a deceased or disabled owner’s stake, keeping the business intact.

This description fits an entity plan because the business is purchasing policies on the lives of the owners, rather than the owners purchasing policies on each other. If it were a cross-purchase arrangement, each owner would own policies on the other owners. A group policy is typically employee-centered and not used for funding owner buyouts. The term buy-sell describes the overall agreement, but the specific funding method described here points to the entity approach.