Under a cross-purchase arrangement, each owner purchases a life insurance policy on the other owner(s). If an owner/insured dies, the surviving owner(s) uses the death benefit to buy the deceased’s share of the business.
Upon retirement, A takes his or her respective policy and B does the same.
If at retirement the insureds “exchange” the policies, there may be tax implications. The taxable amount is equal to the excess of the value of the contract received over the adjusted basis in the contract.
Also, once the policies are exchanged, Insured A no longer has an interest in Insured B’s policy, and Insured B no longer has any interest in Insured A’s policy.
Assuming the policies were exchanged upon the co-owners' retirements, when Owner/Insured A dies, his or her beneficiaries receive the death benefit from Owner/Insured A’s life insurance policy.
Similarly, when Owner/Insured B dies, their beneficiaries receive the death benefit from their life insurance policy.