Life Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
A small manufacturer insures its founder, whose death would cause serious financial loss to the company. This arrangement is best described as:
Select an option to reveal the answer and the full 3-part explanation — free, no signup.
Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Key person insurance protects a business against the financial impact of losing a key employee or owner. The business owns the policy, pays the premiums, and is the beneficiary — the death benefit reimburses the company for lost revenue, recruiting costs, and business disruption. Buy-sell funding, by contrast, is designed to fund the purchase of a deceased owner's interest.
Why the other options are wrong
- B) Buy-sell funding pays the proceeds to the surviving owners (or the estate) to complete a purchase; the company's loss reimbursement is not its purpose.
- C) Split-dollar splits premiums and benefits between employer and employee — not the protection of the company itself against the founder's loss.
- D) Salary continuation uses life insurance to replace an employee's income to the family, not to reimburse the business.
Memory hook
Key person = the company insures its own star player and collects the payout. Protect the asset that earns the money.