A business owner wants a life insurance arrangement under which, if a key employee dies, the business will receive the proceeds and continue paying a salary or benefits to the employee's family for a period. This arrangement is best described as:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
A salary continuation plan uses life insurance on the employee, owned by and payable to the business, so that the business can continue paying the deceased employee's salary or benefits to the family for an agreed period. It is a recognized business use of life insurance along with key person coverage, buy-sell funding, split-dollar arrangements, and deferred compensation. The employer is the policyowner and beneficiary, and the death benefit reimburses the employer for the salary continuation payments it makes to the family. Because the employer has an insurable interest in the employee, the arrangement is valid, and the payments are generally deductible by the employer as compensation.
Why the other options are wrong
- A split-dollar plan splits the premium payments and the death benefit between the employer and the employee or a trust; it is not designed to continue the employee's salary to the family after death.
- A buy-sell agreement uses life insurance to fund the purchase of a deceased owner's business interest from the heirs; its purpose is transferring ownership, not paying family income.
- A key person policy reimburses the business for its own financial loss caused by the death of a key employee; it pays the business for lost revenue, not the family for lost salary.
Memory hook
Salary continuation keeps the paycheck arriving for the family after the employee's last day: the business collects, then pays.