Beneficiary

Key person life insurance is purchased by:

1. A.The government on a taxpayerNo insurable interest exists in this pairing, and the government is not a party to private life contracts. Key person coverage rests on a business's economic stake in a particular employee.
2. B.A business on the life of an essential employeeCorrect - the business owns and benefits.
3. C.A child on a parentA child generally does have insurable interest in a parent, so this could be a perfectly valid policy. It simply is not key person coverage, which turns on a business's stake in an employee rather than a family relationship.
4. D.An employee on the employerThis reverses the parties. The business is the one that suffers the economic loss and therefore owns the policy; an employee insuring the employer is not the arrangement this term describes.

Why: A business buys key person insurance on an essential employee, with the business as owner and beneficiary, to offset the loss if that person dies.

A client wanting tax-deferred growth that passes to heirs may use:

1. A.A taxable savings accountA savings account can name a payable-on-death beneficiary, so the transfer-to-heirs half is achievable and this is not a foolish pick. The growth half fails: interest is taxed every year as it is credited, so nothing is deferred.
2. B.A short-term CDA CD offers a guaranteed rate, which is often mistaken for a tax advantage, but the interest is reportable in the year it is earned. Its short maturity also conflicts with a plan meant to accumulate value across a lifetime and pass on at death.
3. C.A checking accountA checking account is designed for transactions, not accumulation, and pays little or nothing. There is no growth to defer and no investment element at all.
4. D.An annuity with a named beneficiaryCorrect - tax-deferred with a death beneficiary.

Why: An annuity with a named beneficiary grows tax-deferred and passes to the beneficiary at death.

If a life insurance beneficiary is a minor, the proceeds are typically:

1. A.Returned to the insurerThe insurer owes the proceeds once a valid claim arises, and a beneficiary's age does not cancel that obligation. The issue is who may legally receive the money, not whether it is payable at all.
2. B.Paid through a guardian or trustCorrect - a minor cannot take proceeds directly.
3. C.Paid directly to the minorThis is the intuitive answer, and the minor is indeed the rightful beneficiary. But a minor cannot give a valid legal release, so the insurer pays through a guardian or trust rather than handing funds over directly.
4. D.ForfeitedForfeiture would hand the insurer a windfall for a reason unrelated to the risk it underwrote. Naming a minor creates an administrative problem, not a lost claim.

Why: Because a minor cannot directly receive proceeds, they are paid through a guardian or a trust.

A revocable beneficiary designation:

1. A.Can be changed by the owner at any timeCorrect - revocable means changeable.
2. B.Receives nothingRevocable describes how readily the designation can be changed, not whether the person collects. If the designation still stands at death, that beneficiary is paid.
3. C.Is always the estateThe estate receives proceeds when no living beneficiary is named, an outcome generally worth avoiding. A revocable designation names a specific person and simply leaves the owner free to substitute another.
4. D.Cannot be changed without consentThis describes an irrevocable designation, the opposite arrangement. The defining feature of a revocable designation is that the owner needs nobody's permission to change it.

Why: A revocable beneficiary can be changed by the policyowner at any time.