How many life insurance policies does a cross-purchase agreement require?

The policy count grows with the number of owners

The number of policies in a cross-purchase agreement depends on the number of owners. The formula reflects the fact that each owner purchases coverage on each of the other owners.

Each policy exists to fund a buyout. Every policy is therefore tied to a specific co-owner whose shares may need to be purchased.

A two-owner agreement is the simplest case.

Individual owners hold the policies and pay the premiums

Policy ownership in a cross-purchase structure sits with the individual business owners. Practitioners describe each owner as buying a policy on the other owner, paying the premiums personally, and serving as the beneficiary.

Surviving owners hold policies on one another. After a death, they purchase the deceased owner's shares using proceeds paid directly to them.

Practitioners also note that a cross-purchase requires owner policy maintenance and premium payment coordination. With several owners, each of those tasks spans every policy in the formula above.

Basis is the tax point practitioners raise

The purchasing owner is the surviving owner who buys the deceased owner's shares with the policy proceeds.

The same structure places the policies outside the company.

How the formula scales as owners are added

Adding an owner adds policies on both sides of the arrangement. The new owner needs coverage on every existing owner, and every existing owner needs coverage on the new owner.

Because n appears twice in the formula, the policy count rises faster than the owner count. Each added policy carries its own premium, paid personally by the owner who buys it, along with its own maintenance.

Common questions