A corporation buys a life insurance policy on its chief executive officer. This arrangement is generally valid because:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
A business has an insurable interest in the life of a key person, such as an executive, founder, or other essential employee, because the business depends on that person's services, knowledge, and leadership. Under CIC Section 10110 and general law, the economic loss the business would suffer at the key person's death creates a valid insurable interest, making key-person life insurance a standard business planning tool. Proceeds reimburse the business for lost revenue and the costs of finding and training a replacement, which is why the corporation is named as owner and beneficiary.
Why the other options are wrong
- B) The chief executive officer is not legally required to purchase the policy. Key-person coverage is a voluntary business decision made by the company, which buys and owns the policy on its own initiative.
- C) A business cannot insure just anyone without restriction. It must demonstrate a genuine economic dependency or an insurable relationship, such as a key employee, a partner, or a debtor.
- D) Business-owned policies remain subject to the insurable interest requirement. The business must show that it would suffer an economic loss from the insured's death at the time the coverage is procured.
Memory hook
Key person = the engine. If the engine dies, the business's loss is its insurable interest.