A company buys a key-person life insurance policy on its sales manager. Five years later the manager resigns, but the company keeps the policy in force. Which statement best describes the policy's status?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Under California Insurance Code Section 10110 and general life insurance law, the policyowner must have an insurable interest in the insured's life at the time the policy is taken out. Once a valid life insurance contract exists, the later loss of that interest, such as a key employee leaving the company, does not void the policy. This is the opposite of property insurance, where insurable interest must exist at the time of loss. The contract continues in force according to its own terms, so the death benefit remains payable as written and the company may keep the coverage it purchased.
Why the other options are wrong
- B) Termination of employment does not automatically void an existing life insurance contract. The policy was validly issued when the insurable interest existed, and California law does not cancel the coverage simply because the underlying employment relationship later ends.
- C) No new consent form is required to keep the policy in force after a key employee departs. The insurable interest requirement is satisfied at the time the policy is issued, so the later change in the working relationship does not create a new consent obligation.
- D) Nothing in California law requires a reduction of the death benefit when a key employee leaves the company. The face amount remains exactly as written in the policy, and the employer keeps the coverage it purchased.
Memory hook
Life checks insurable interest at the door, not at the exit. Lost interest later never voids the policy.