California Life-Only & Accident and Health AgentLife InsuranceEasy
A small business owner has a key employee whose sudden death would cause significant financial loss to the company. The owner wants to purchase a life insurance policy on this employee, with the company as the beneficiary, to mitigate this risk. Which type of life insurance would be most appropriate for this situation?
- AGroup Life Insurance
- BKey Person Life Insurance
- CIndividual Term Life
- DCredit Life Insurance
Show answer & explanationAnswer & explanation
Correct answer: B. Key Person Life Insurance
Key Person Life Insurance is specifically designed for businesses to protect against the financial loss that would result from the death of a critical employee. The business is the policyowner, pays the premiums, and is the beneficiary.
Why the other options are wrong
- A. Group Life Insurance covers a group of employees, usually with the employees as beneficiaries, not the company for a specific risk.
- C. Individual Term Life could be used, but 'Key Person Life Insurance' is the specific and most appropriate term for this business use.
- D. Credit Life Insurance pays off a debt and is not suitable for protecting a business from the loss of a key employee.
Key Person Life Insurance
Life insurance purchased by a business on the life of a vital employee, with the business as the beneficiary, to protect against financial loss if the employee dies.
- Business is the owner, premium payer, and beneficiary.
- Protects against loss of income, business disruption, and cost of finding/training a replacement.
- Death benefit is typically tax-free to the business.
Memory trick: Buy-Sell, Key Person, Executive Perks: Business insurance works.