A corporation wants to provide an executive with a benefit paid after retirement, funded while the executive is working. Which business use of life insurance fits this objective?
Select an option to reveal the answer and the full 3-part explanation — free, no signup.
Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Deferred compensation is a contractual arrangement in which the employer promises to pay an executive income in the future — typically at retirement — in exchange for current services. Life insurance is often used to fund the obligation: the employer owns and pays premiums on a policy on the executive's life, and the death benefit or accumulated values help fund the promised payments. Key person insurance instead protects the company against the financial loss caused by the death of a vital employee; buy-sell funding finances the purchase of a deceased owner's interest; an overhead expense policy pays a business's fixed costs if the owner is disabled.
Why the other options are wrong
- B) Key person insurance is owned by the business and reimburses it for the financial loss caused by the death of a vital employee. It does not fund that employee's retirement income or provide the executive a future benefit.
- C) Buy-sell agreement funding provides cash so a business can purchase a deceased owner's ownership interest from the estate. It serves ownership transfers, not a retirement income benefit for an executive.
- D) A business overhead expense policy pays a business's fixed operating costs during an owner's disability. It is disability protection for the business, not a vehicle for funding an executive's retirement income.
Memory hook
Deferred comp = pay the executive later, fund it now with life insurance on the executive.