Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceHard
A business owner wants to provide life insurance for their top sales executive, whose unexpected death would cause a significant financial loss to the company. The policy would be owned by the business, with the business as the beneficiary. What type of life insurance arrangement is this?
- AGroup Life Insurance
- BDeferred Compensation Plan
- CKey Person Life Insurance
- DExecutive Bonus Plan
Show answer & explanationAnswer & explanation
Correct answer: C. Key Person Life Insurance
Key Person Life Insurance is designed to protect a business from financial loss due to the death of a valuable employee. The business owns the policy, pays the premiums, and is the beneficiary. The death benefit compensates the business for lost revenue, recruitment costs, and business disruption.
Why the other options are wrong
- A. Group life insurance covers multiple employees, often with the employee's family as beneficiary, not primarily for business protection from a specific key individual's death.
- B. A Deferred Compensation Plan is a retirement or savings plan where a portion of an employee's salary is paid out at a later date, not a life insurance arrangement for business protection.
- D. An Executive Bonus Plan involves the employer paying premiums on a policy owned by the executive, with the executive's chosen beneficiary, as a form of executive compensation.
Key Person Life Insurance
Life insurance purchased by a business on the life of a valuable employee (Key Person) to protect the business from financial loss due to that employee's death. The business owns the policy, pays premiums, and is the beneficiary.
- Business owns the policy
- Business pays the premiums
- Business is the beneficiary
- Death benefit compensates the business for losses (e.g., lost revenue, replacement costs)
- Premiums are NOT tax-deductible; death benefit is generally tax-free to the business
Memory trick: Key Person: The business protects its vital assets.