A professional firm wants to guarantee that a key employee's salary will keep flowing if the employee is unable to work due to injury or illness. Which business use of insurance funds this salary-replacement need?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
A wage continuation plan is a business arrangement that provides income to an employee during a period of disability or other absence from work, funded by insurance designed to replace lost earnings. The firm funds the plan so the employee's salary continues while the employee cannot work, protecting both the employee's finances and the employer's interest in retaining key personnel. This is one of the standard business uses of insurance coverage listed in the California objectives, alongside key person insurance, buy-sell funding, deferred compensation, and business expense coverage. The distinguishing feature is income replacement for a living but non-working employee.
Why the other options are wrong
- B) Buy-sell funding uses life insurance to give the business owners the cash to purchase a deceased owner’s interest in the firm. It has nothing to do with continuing a disabled employee’s salary during a period of disability.
- C) Split dollar splits the premium and benefits of one permanent policy between employer and employee for estate and benefit purposes. It is not designed to provide disability income replacement for a key employee.
- D) Instant estate refers to life insurance creating an immediate death benefit for beneficiaries upon the insured’s death. It is not salary continuation for a living employee who cannot work, which is what a wage continuation plan addresses.
Memory hook
Wage continuation = paychecks on autopilot while the employee is down. Income protection for the disabled worker.