Life Insurance: What Is an Entity Purchase Agreement?

An entity purchase agreement is an agreement that utilizes life insurance in order to make sure that business ownership will be transferred correctly. Here are the basics of an entity purchase agreement and how it works.

Entity Purchase Agreement

If a business is owned by more than one individual, they might set up an entity purchase agreement in order to convey one of the owners shares of a company when they pass away. With this arrangement, whenever one owner dies, the remaining owners will buy out that owner's shares in the company. The money will be paid to the estate of the deceased owner.

Life Insurance

Most of the time, this agreement is facilitated by purchasing life insurance on each owner of the business. The beneficiaries of each life insurance policy will be the remaining owners in the company. Whenever one owner dies, the life insurance will pay a certain amount of money to the remaining owners. That money will then be used to pay for the deceased owner's share in the company. Before this process is set up, the owners will agree on a purchase price for their part of the company. They will then make sure that the payout of the life insurance policy is equal to that amount.