In a privately owned corporation, which arrangement involves the corporation purchasing a policy on each shareholder?

In a privately owned corporation, which arrangement involves the corporation purchasing a policy on each shareholder?

• A. Entity purchase
• B. Stock purchase
• C. Cross purchase
• D. Stock redemption

Answer: (A)

Entity purchase is the arrangement where the corporation itself owns and pays for life insurance on the lives of its shareholders. When a shareholder dies, the death benefit goes to the corporation, which uses it to buy that shareholder’s stock from the estate. This setup keeps control with the remaining owners and provides liquidity to fund the buyout, with premiums treated as a corporate expense and the company directly controlling the policy. Other setups differ in who owns the policies and how the funding works. In a cross-purchase plan, the policies are owned by the individual shareholders (each funded on the lives of the others), not by the corporation. In a stock redemption plan, the corporation still aims to redeem shares, but the ownership structure of the policies and the funding mechanics are arranged differently, not the scenario where the corporation purchases a policy on each shareholder’s life.

Entity purchase is the arrangement where the corporation itself owns and pays for life insurance on the lives of its shareholders. When a shareholder dies, the death benefit goes to the corporation, which uses it to buy that shareholder’s stock from the estate. This setup keeps control with the remaining owners and provides liquidity to fund the buyout, with premiums treated as a corporate expense and the company directly controlling the policy.

Other setups differ in who owns the policies and how the funding works. In a cross-purchase plan, the policies are owned by the individual shareholders (each funded on the lives of the others), not by the corporation. In a stock redemption plan, the corporation still aims to redeem shares, but the ownership structure of the policies and the funding mechanics are arranged differently, not the scenario where the corporation purchases a policy on each shareholder’s life.