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A
Insurance purchased by an employee on their own life
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B
Life insurance purchased by a BUSINESS on the life of a key employee — the business is both the owner and beneficiary; the purpose is to protect the business from financial loss caused by the death of an employee whose contributions are critical to operations
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C
Insurance purchased by a bank to protect against loan defaults
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D
A type of group insurance available only to executives
Why this is the answer
KEY PERSON INSURANCE (also called key man insurance) is a business planning use of life insurance that addresses a specific financial risk: what happens to a business when an irreplaceable person dies? STRUCTURE: INSURED: The key employee (must consent to be insured); OWNER: The business entity (not the employee); BENEFICIARY: The business; PREMIUM PAYER: The business. PURPOSE: The death benefit received by the business provides funds to: recruit and train a replacement executive; compensate for lost revenue while the replacement is brought up to speed; reassure lenders and investors of business continuity; repay loans that the key person personally guaranteed; INSURABLE INTEREST: The business has insurable interest in a key employee because the business would suffer genuine financial loss from their death; INCOME TAX TREATMENT: Premiums paid by the business are generally NOT tax-deductible; death benefit received by the business is generally income tax-free (IRC Section 101(a)) — BUT: COLI (corporate-owned life insurance) policies must comply with IRC Section 101(j) notice and consent requirements; if these are not met, the death benefit may become partially taxable; CONSENT REQUIREMENT: The employee must give written consent to be insured; the business cannot secretly take out insurance on an employee's life; EXAMPLES: Software company insures its lead developer; restaurant group insures its master chef; manufacturing company insures its chief engineer.
Source: Life Insurance License Exam, Key Person Insurance