Key Person Life Insurance

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 firm that would suffer financially if a vital employee died should carry:

1. A.Property insurance onlyProperty coverage restores physical assets after damage. The loss described here is the departure of a person, which no property policy responds to.
2. B.A 529 planThis is an education savings vehicle. It sets money aside toward tuition and pays nothing at all when an employee dies.
3. C.Personal term insurance on a competitorInsurable interest is missing entirely. A firm gains nothing legitimate from a competitor's death, and the coverage must be written on the employee whose loss the firm would actually feel.
4. D.Key-person insuranceCorrect - covers loss of a vital employee.

Why: Key-person insurance protects the business against the financial loss from a key employee's death.

A key employee's death would financially harm a company. The company should:

1. A.Do nothingLeaves a real loss uninsured. The stem stipulates measurable financial harm, which is the textbook description of an insurable exposure.
2. B.Buy the employee a personal annuityFunds the employee's retirement rather than compensating the company for losing them. No money reaches the business when the death occurs.
3. C.Buy key-person insurance owned by the businessCorrect - business-owned coverage on the key person.
4. D.Have the employee insure the companyReverses the parties. A company has no life to insure, and since the loss falls on the business, the business should own the policy and collect the proceeds.

Why: Key-person insurance, owned by and payable to the business, offsets the financial loss from a key employee's death.

A tech firm purchases life insurance on its lead engineer, whose death would cause a severe loss of revenue. Which statement correctly describes this key-person arrangement?

1. A.The firm is owner, payer, and beneficiary with the engineer's consent; premiums are nondeductible but proceeds are generally tax freeCorrect. All ownership rights and the benefit run to the business, with consent from the insured and the standard tax treatment.
2. B.The premiums are deductible as an ordinary business expenseLife premiums are not deductible when the payer is a beneficiary - the trade-off for income-tax-free proceeds.
3. C.The firm lacks insurable interest because it is not related to the engineer by blood or marriageInsurable interest also arises from financial dependence - a business has it in employees whose death would cause economic loss.
4. D.The engineer's family must be named beneficiary for the policy to be validKey-person coverage protects the BUSINESS - the firm is properly the beneficiary; the family has no required role.

Why: In key-person insurance the business is applicant, owner, premium payer, and beneficiary; the key employee simply consents as the insured. The firm's financial dependence on the engineer supplies insurable interest. Premiums are NOT tax-deductible, but the death proceeds are generally received income-tax free.