California Life and Health Insurance Practice Exam

Buy-sell plans are typically funded by which two types of insurance?

1. Health insurance and life insurance

2. Life insurance and disability insurance

3. Term insurance and whole life insurance

4. Auto insurance and health insurance

The correct answer is: Life insurance and disability insurance

Buy-sell plans are arrangements that facilitate the transfer of ownership of a business in the event of an owner’s death or disability. The primary goal of these plans is to ensure that remaining owners can buy out the deceased or disabled owner's share of the business, thereby maintaining control and continuity of the business. Life insurance is integral to buy-sell plans because it provides the necessary liquidity upon the death of an owner. The death benefit from the life insurance policy allows the surviving business partners to purchase the deceased owner's share without causing financial strain or disruption to the business. Disability insurance plays a complementary role by ensuring that in the event an owner becomes disabled and cannot actively participate in the business, there are funds available to buy their share. This type of insurance provides an income stream that can be used to facilitate the buyout of the disabled owner's interest, thereby stabilizing the business and protecting the interests of the remaining owners. Other options, such as health or auto insurance, do not play a role in funding buy-sell agreements, as they do not provide the necessary funds or benefits that are specific to the occurrence of death or disability impacting business ownership. Therefore, life insurance and disability insurance are correctly identified as the two types of insurance used to fund buy-sell