Cross Purchase Or Entity Buy-Sell?

In my previous blog posts, I have discussed ways to protect our legacies with proper planning, including buy-sell arrangements. I also have noted ways that executive bonus funded insurance plans can be used for key employees to recognize their value and to protect both the employees and the company (see “Thoughts About Legacy,” “How Do We Protect Our Legacies,” and “Protecting Your Business Legacy - Avoid Mistakes by Planning in Advance.”)

This split-dollar arrangement may benefit a business when both key employees and the company agreeably and equitably share the insurance cost and value over a defined period of time.

When should a business put into place such agreements? Every organization is different, so there is no specific time frame for this type of planning. Every business will go through their own processes to determine what will work best for the most benefit.

For example, one arrangement could be by automatic succession—protecting one’s legacy—where it has already been agreed that close family members will assume leadership.

Other companies may have a group of key employees with one or more of them having multiple responsibilities that an owner would want to recognize and reward for their work, efforts, and contributions.

Since every business is unique, just as there isn’t a specific time frame for when to put arrangements in place, there isn’t a specific formula or model that is used. Multiple aspects should be considered, such as the employees’ ages, length of employment and individual salaries as well as the type of products or services provided.

Additional factors—both apparent and hidden—that are not known outside the company may be also in play which must be addressed. When developing a company plan, confidentiality must be maintained while protecting a company’s primary assets. These could be products, personnel, or financials.

My role is to work seamlessly with my clients, their attorneys, and accountants to help fund such agreements with life and disability income protection.

Without going into all the variations available in a buy-sell agreement, the two fundamental plans are cross-purchase and entity purchase.

Simply put, a cross-purchase would have three or less individuals purchasing policies on each other for a predetermined value. An entity purchase would have the company purchasing all the policies on each of the individuals named. This works best when there are more than three employees named in a buy-sell agreement.

I would love you to contact me to begin your discussion. Our conversation would be time well spent, with no obligation on your part. I’m compensated only when I am able to secure life and disability protection for you, your company, and your family.

Sometimes this discussion might even include using Long Term Care insurance, which would be a strong backup and provide guarantees for everyone involved.