Question

A partnership has 5 partners who have entered into a binding buy/sell agreement that requires any surviving partners to purchase the partnership interest of any other partner to die. The partnership uses an entity approach to fund this arrangement. How many insurance policies are required to satisfy this arrangement?

a. 1      b. 5     c. 10    d. 20

Answer 1

b. 5

In entity approach,

An entity purchase buy-sell agreement is an arrangement between the partner and the entity. The business agrees to pay the partner or partner's estate an agreed amount for the partner's interest upon a triggering event

When funded with life insurance, the entity is the owner and beneficiary of the policy and will pay the premiums on the policy. When the triggering event happens, the entity uses the death benefit or cash value to purchase the partner's interest.

Hence, for 5 partners, 5 insurance needs to be purchased.