Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceMedium
A business owner wants to provide life insurance for their top sales executive. The policy is owned by the company, and the company is also the beneficiary. The purpose of the policy is to reimburse the company for potential financial losses if the executive were to die prematurely. What type of insurance arrangement is this?
- ADeferred Compensation Plan
- BExecutive Bonus Plan
- CKey Person Life Insurance
- DGroup Life Insurance
Show answer & explanationAnswer & explanation
Correct answer: C. Key Person Life Insurance
Key Person Life Insurance is purchased by a business on the life of a valuable employee (the 'key person'). The business owns the policy, pays the premiums, and is the beneficiary. The death benefit is used to offset the financial losses the business would incur due to the key person's death.
Why the other options are wrong
- A. A Deferred Compensation Plan is a retirement plan, not a life insurance arrangement designed to protect the company from the death of a key employee.
- B. An Executive Bonus Plan is a type of non-qualified plan where the company pays the premium for a life insurance policy owned by the executive, and the executive is the beneficiary.
- D. Group life insurance typically covers multiple employees, with benefits paid to their individual beneficiaries, not directly to the company for its own loss.
Key Person Life Insurance
Life insurance purchased by a business on the life of an employee whose death would cause significant financial loss to the company. The business owns the policy, pays premiums, and is the beneficiary.
- Business owns the policy
- Business pays premiums
- Business is the beneficiary
- Protects against financial loss from key employee's death
Memory trick: Key person protects the company's core.