Rhode Island Life Insurance Practice Exam

Which statement regarding a Key Employee Life policy is NOT true?

1. The beneficiary is named by the key employee

2. The employer pays the premium for the policy

3. The coverage is typically for a specified term

4. The policy can provide tax-free benefits to the employer

The correct answer is: The beneficiary is named by the key employee

A Key Employee Life policy is designed to provide financial protection for a business in the event of the loss of a key employee whose contributions are vital for the business's operations. The primary purpose of this policy is to help the business maintain stability and cover costs that may arise from the sudden loss of this individual. In this context, the statement regarding the beneficiary being named by the key employee is not accurate because generally, in a Key Employee Life policy, the employer is the one who purchases the policy and thus has the right to name the beneficiary—often themselves or the business. They pay the premiums, which supports the business's interest in safeguarding its operations against the risk posed by losing a key employee. The employer typically pays the premiums to maintain control over the policy, ensuring that it is in alignment with the company’s financial calculus. Coverage can be in the form of a term life policy, which aligns with the temporary needs for financial protection rather than permanent coverage. Additionally, the benefits from the policy can indeed be tax-free to the employer, further emphasizing the financial advantages of having such a policy in place. Thus, the statement regarding the beneficiary being named by the key employee incorrectly represents the nature of who controls the policy and its benefits.