Final answer:
The described scenario is (D) a cross-purchase buy-sell plan, where each partner holds a life insurance policy on the others to buy out the deceased partner's business interest.
Step-by-step explanation:
The scenario described where three business partners each own life insurance on the others and agree to buy a deceased partner's share of the business pertains to a cross-purchase buy-sell plan. In such an arrangement, each partner holds a life insurance policy on the other partners.
Upon the death of any partner, the death benefit from the policy is used to purchase the decedent's share of the business at a previously agreed upon price, thus ensuring that the business can continue smoothly without having to liquidate assets.