An Arizona business owner and a key employee sign a buy-sell agreement under which each will purchase the other's ownership interest upon death. What is the status of the owner's insurable interest when the owner applies for life insurance on the employee's life?

Why C is correct

Under A.R.S. 20-1104, persons who are not closely related by blood or law may still have an insurable interest if they hold a lawful and substantial economic interest in the continued life, health, or safety of the insured, and the statute expressly recognizes parties to a buy-sell or option contract. The owner's financial stake in the employee's continued service satisfies the test, so coverage funding the buy-sell obligation is validly insurable from inception.

Why the other options are wrong

• A) Relatives are one basis for insurable interest, but A.R.S. 20-1104 provides a separate economic-interest basis that covers buy-sell parties.
• B) Love and affection is reserved for individuals closely related by blood or law; business relationships qualify only through economic interest.
• D) An interest arising only from the insured's death is exactly what A.R.S. 20-1104 forbids; the economic stake must exist in the employee's continued life.

Memory hook

Buy-sell partners insure by wallet, not by heart — economic interest is the key.