A small business owner wants the business to continue paying the owner's family a specified income for a set number of years after the owner's death, so that the family's standard of living is maintained during the transition. Life insurance is used to fund this promise. This arrangement is known as:

Why A is correct

Salary continuation is an arrangement in which a business agrees to continue paying the income of a deceased (or disabled) owner or key employee to the family for a specified period, and life insurance on the owner funds that obligation. The business is the owner and beneficiary of the policy, and the proceeds are used to make the promised payments. It is a way to provide a personal benefit to the family while satisfying a business commitment.

Why the other options are wrong

• B) Deferred compensation pays the executive during retirement, not the family after the executive's death.
• C) Split dollar is a cost-and-benefit sharing arrangement between an employer and an employee, not a family income promise.
• D) Business overhead expense insurance pays the firm's ongoing fixed expenses during an owner's disability, not the owner's family income after death.

Memory hook

Salary continuation keeps the family's income coming after the owner dies. Fund it with life insurance on the owner.

Why A is correct

Salary continuation is a plan under which a business agrees to continue paying a portion of an owner's or employee's salary to the family for a set period after death or disability. Life insurance on the employee, owned and paid for by the business, provides the funds, so the family receives income during the continuation period. The coverage is designed to replace a portion of lost earnings rather than to reimburse the business. Salary continuation is one of the business uses of life insurance that supports both the employee family and the business's promise.

Why the other options are wrong

• B) Key person insurance pays the business itself for financial losses caused by the death of a valued employee; it does not pay the family a continuing salary. The family is the payee here, which makes the arrangement a continuation of salary rather than employer reimbursement.
• C) Buy-sell agreements fund the purchase of the deceased owner's interest in the business; they do not provide income to the family after death. A buy-sell transfer of the deceased partner's interest is a different goal from paying income to the family.
• D) Business overhead expense coverage is a disability product that pays the ongoing fixed expenses of the business, not a family income after death. Overhead expense coverage pays business bills during the owner's disability, not family income after death.

Memory hook

Salary to the family after death = salary continuation. Money to the business = key person.

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.

Why A is correct

A salary continuation plan is an employer-funded arrangement that continues income to an employee during disability or to the employee's family after death. The employer owns and pays for the life insurance, is the beneficiary, and pays the promised continuation benefits from its own funds. It is a form of nonqualified deferred compensation focused on income replacement, distinct from retirement plans and from buy-sell funding between owners.

Why the other options are wrong

• B) A qualified retirement plan is tax-qualified and governed by ERISA and IRC rules; salary continuation is nonqualified.
• C) A buy-sell agreement funds the purchase of a deceased owner's business interest, not employee income continuation.
• D) An IRA is an individual retirement savings vehicle, not an employer income-continuation arrangement.

Memory hook

Salary continuation = the employer keeps the paycheck coming during disability or after death, funded by its own life policy.