A cross-purchase arrangement is a business ownership funding mechanism where each owner in a closely held company owns and pays premiums on life insurance policies on the other owners. When an owner dies, the surviving owners receive the death benefit directly and use it to buy the deceased owner’s interest.
Coverage intent
The structure protects continuity of management and ownership by giving the survivors a defined funding source for share transfer costs at an otherwise difficult moment.
Underwriting and policy mechanics
- All participating owners are usually separately insured and named as policy owners and beneficiaries in line with the buyout agreement.
- Actuarial inputs include age, health status, face amount needs, and agreed valuation triggers.
- The agreement should define premium ownership, payout beneficiaries, and what happens when a partner retires, sells out, or is disabled.
- A policy lapse, unpaid premium, or missed update to ownership records can cause an ownership transfer gap.
Claims and legal logic
- The insurer pays the policy proceeds to policy owners or trustees named in the contract terms.
- Claims claims review focuses on proof of loss, beneficiary identity, and policy force at date of death.
- If the agreement terms conflict with policy ownership, claim delivery may be delayed and disputes can shift to contract interpretation.
Practical example
Two owners agree that each will carry coverage on the other at the current valuation of the other owner’s share. The policy on owner A pays out to owner B after A dies. Owner B uses the proceeds to redeem A’s equity and keep operations intact without external financing.