Which provision determines what happens to a business if an owner dies or becomes disabled?

Which provision determines what happens to a business if an owner dies or becomes disabled?

• A. Buy-sell agreement
• B. Cross purchase
• C. Change of insured provision
• D. Entity purchase

Answer: (C)

A buy-sell agreement sets the plan for what happens to ownership if an owner dies or becomes disabled. It spells out who buys the departed or disabled owner’s interest, at what price, and under what terms, so the business can continue smoothly and the owners’ families are treated fairly. This is typically funded with life insurance in one of two common ways: cross-purchase, where each owner buys policies on the others’ lives so, upon a death, the surviving owner can purchase the deceased’s share; or entity purchase, where the business buys policies on the owners and uses the proceeds to buy their shares. The change of insured provision is a policy feature that allows the insured on a policy to be updated when ownership changes, but it does not by itself determine the business outcome of what happens upon death or disability.

A buy-sell agreement sets the plan for what happens to ownership if an owner dies or becomes disabled. It spells out who buys the departed or disabled owner’s interest, at what price, and under what terms, so the business can continue smoothly and the owners’ families are treated fairly. This is typically funded with life insurance in one of two common ways: cross-purchase, where each owner buys policies on the others’ lives so, upon a death, the surviving owner can purchase the deceased’s share; or entity purchase, where the business buys policies on the owners and uses the proceeds to buy their shares. The change of insured provision is a policy feature that allows the insured on a policy to be updated when ownership changes, but it does not by itself determine the business outcome of what happens upon death or disability.