West Virginia State Life Insurance Practice Exam

In a partnership where two partners equally own a business valued at $1,000,000 and purchase life insurance for a Buy-Sell Agreement, what is true?

1. Each partner owns a $500,000 policy on their partner's life

2. Each partner owns a $1,000,000 policy on their own life

3. They do not need life insurance for a Buy-Sell Agreement

4. Each partner's policy is shared between them

The correct answer is: Each partner owns a $500,000 policy on their partner's life

In the context of a Buy-Sell Agreement for a partnership, it is essential to ensure that the business can continue operating smoothly after the unexpected death of one of the partners. Given that the two partners equally own a business valued at $1,000,000, the purpose of the life insurance purchased is to provide funds to facilitate the buyout of the deceased partner's share. Therefore, each partner would indeed own a policy valued at $500,000 on the life of their partner. If one partner passes away, the policy payout would provide the surviving partner with the necessary funds to buy the deceased partner's 50% share of the business, worth $500,000. This structure effectively eliminates any financial burden on the surviving partner and ensures that the deceased partner's beneficiaries receive fair compensation for their interest in the business. The other options reflect misunderstandings about the purpose of the policies in a Buy-Sell Agreement. For example, the notion that each partner would own a $1,000,000 policy on their own life misaligns with the typical setup, as the insurance is meant to cover only the value of the deceased partner's share. The idea that life insurance is unnecessary for such an agreement overlooks the critical financial planning aspect that aids