An employer purchases a life insurance policy on a key employee. The employer's insurable interest exists because:

Why A is correct

An employer has an insurable interest in a key employee because the employee's death would create a financial loss - lost revenue, the cost of recruiting and training a replacement, and disrupted operations. This economic-exposure basis makes key-person coverage valid: the employer owns the policy, pays the premiums, and is the beneficiary. The insurable interest must exist when the policy is issued. Although there is no fixed statutory cap on key-person coverage, the amount is generally justified by the employer's estimated economic loss, which keeps the arrangement from becoming a speculative wager on the employee's life.

Why the other options are wrong

• B) The employee's consent is a separate underwriting and good-practice matter. It does not create the employer's insurable interest, which rests on the economic loss the employer would suffer rather than on anything the employee signs.
• C) Paying most of the employee's compensation does not by itself establish an insurable interest. The controlling test is whether the employer reasonably expects to benefit from the employee's continued life and would lose that benefit at death.
• D) No law requires an employee to maintain life insurance for the benefit of an employer. The coverage exists because the employer chooses to buy it, not because the employee is legally obligated to carry it.

Memory hook

Key-person coverage insures the employer's wallet; the lost profit is the loss.