What is a Cross-purchase Plan in insurance terms?

A Cross-purchase Plan is a type of buy-sell agreement in which each owner of a business or partnership takes out an insurance policy on the lives of the other owners. In the event that one partner passes away, the remaining partners can use the death benefit from the policy to buy the deceased partner's share of the business. This arrangement ensures that the business can continue operating smoothly without being financially disrupted by the loss of a partner and secures the heirs of the deceased partner by providing them with a fair valuation for their share.

This approach is particularly beneficial in closely-held businesses where the partners are directly involved in day-to-day operations and where continuity is key to preserving the business’s value and function. The funds derived from the insurance proceeds enable the remaining partners to maintain control and prevent external parties from becoming involved in the business unexpectedly.

The other options describe unrelated concepts. Dividends from insurance are not the focus of this plan, group insurance refers to policies that cover a group typically in an employment or association context, and selling insurance directly to consumers does not capture the essence of the Cross-purchase Plan, which is specifically about business partner arrangements and insurance for continuity purposes.