What characterizes a cross purchase plan?

A cross purchase plan is characterized by each stockholder buying insurance on every other stockholder's life. This approach allows the remaining shareholders to use the death benefit of the policy to buy the deceased shareholder's interest in the company. In this arrangement, individual stockholders take on the responsibility of securing the policies, which ensures that funds are available for the purchase of shares when one of the stockholders passes away, thus facilitating a smooth transition of ownership while maintaining the continuity of the business.

This method is advantageous in closely held corporations where the stockholders have a direct financial interest in each other's lives, as it provides a clear pathway for business succession and protects the value of each stockholder’s investment.