Life Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
An employer wants to reward a key executive with retirement income but must restrict eligibility to a select group rather than all employees. Life insurance is commonly used to fund such a plan because:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
A nonqualified deferred compensation arrangement is often funded with life insurance: the employer owns the policy on the key employee, pays the premiums, and is the beneficiary. Premiums are not currently tax-deductible, but the cash value grows tax-deferred and the employer receives the death benefit income-tax-free to fund the promised payments. Because the plan is nonqualified, the employer can choose which employees participate, unlike qualified plans that must meet broad coverage and nondiscrimination rules.
Why the other options are wrong
- B) In a nonqualified deferred compensation arrangement the employer, not the executive, is the owner and beneficiary; the executive holds only an unsecured contractual promise.
- C) Premiums on employer-owned life insurance are generally NOT deductible as a current business expense.
- D) The plan is nonqualified and outside ERISA's qualified plan requirements, and there is no rule mandating whole life funding.
Memory hook
Employer owns, pays, and collects. The executive gets a promise; premiums fund tax-deferred cash value.