Question

Which of the following is true in regard to an Entity Purchase Plan?

A. The owners are named as beneficiaries in the policy acquired
B. The entity buys life insurance on non-owner key employees
C. The business enters into an agreement to purchase the deceased's interest in the business
D. It is an incentive plan for key employees

Answer 1

Option C is correct for an Entity Purchase Plan where the business agrees to buy the deceased owner's interest. Owners are not beneficiaries, and it's not a key employee incentive or insurance plan.

Step-by-step explanation:

The correct answer in regard to an Entity Purchase Plan is C. The business enters into an agreement to purchase the deceased's interest in the business. An Entity Purchase Plan, also known as a 'buy-sell agreement,' is a contractual arrangement where the business entity itself is obligated to buy the interests of a deceased or withdrawing owner. Option A is incorrect because in an Entity Purchase Plan, the entity, not the individual owners, is the beneficiary of the policies.

Option B refers to key person insurance, which is a different concept where an entity purchases insurance on the lives of employees crucial to the business, not owners. Lastly, Option D is incorrect as it describes an incentive plan, which is unrelated to handling the buyout of a deceased owner's business interest.