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In: Finance

A business valued at $2,000,000 has 4 partners. Each of the 4 partners buys a a...

A business valued at $2,000,000 has 4 partners. Each of the 4 partners buys a a $180,000 life insurance policy for purposes of a buy-sell agreement on each of the other partners. Which of the following is/are true?

1. This is an example of an entity purchase plan.

2. This is an example of a cross purchase plan.

3. The buy-sell agreement is over-funded.

Group of answer choices

2 only

1 only

2 and 3 only

1 and 3 only

Solutions

Expert Solution

Answer 2 &3 are true

In case of business entity purchase plan, the insurance is purchased by the business entity, but in case of cross purchase plan of a buy sell agreement, the partners takes insurance on the life of the other partners so that the deceased partner stake can be purchased from his estate.

The value of business $2,000,000 with 4 partners.. so each partners share = $2000000/4 = $500000. Thus each partners takes the life insurance of remaining 3 partners for $500000/3 = $166,667. However the policy purchased is of $180000. Thus it is over funded.

So the statement 2 & 3 are correct.

jeff jeffy answered 2 years ago
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