Pearson Vue - Business Uses of Life Insurance and
Types of Life Insurance Policies & Provisions / Policy
Ownership & MECs Verified Multiple Choice and
Conceptual Actual Emended Exam Questions With
Reviewed 100% Correct Detailed Answers
Guaranteed Pass!!Current Update
1. The main purpose of Key Person life insurance is to:
A) Replace employee benefits for a deceased worker’s family
B) Provide personal retirement income for executives
C) Protect the business from financial loss due to the death of a key
employee
D) Satisfy ERISA coverage rules
Answer: C
2. True or False: The insured in a Key Person policy names the beneficiary.
Answer: False — the business is beneficiary.
3. In a Key Person policy, the business is usually:
A) The insured
B) The policyowner and beneficiary
C) Only the payor of premiums
D) None of the above
Answer: B
4. Which of the following is a valid use of Key Person insurance?
A) Funding an employee’s personal debts
B) Guaranteeing employee retirement income
C) Training and replacing a valuable executive
D) Funding a worker’s IRA
Answer: C
,5. Premiums for Key Person insurance are generally:
A) Tax-deductible
B) Not tax-deductible
C) Paid with pre-tax dollars
D) Reimbursed by the insured
Answer: B
6. True or False: Death benefits under Key Person insurance are typically
income tax-free to the business.
Answer: True
7. If a key employee leaves the company, the business may:
A) Cancel the policy and receive no value
B) Surrender the policy for its cash value
C) Transfer ownership to the employee
D) Both B and C
Answer: D
8. Which of the following is NOT a purpose of Key Person insurance?
A) Maintain business credit
B) Replace lost profits
C) Pay off the insured’s personal mortgage
D) Cover the costs of hiring and training replacements
Answer: C
9. True or False: Term life insurance is never used for Key Person coverage.
Answer: False — both term and permanent may be used.
10.The amount of Key Person insurance is generally determined by:
A) Federal guidelines
B) Value of the employee to the company
C) Employee’s personal debts
D) Insurer’s suggestion only
Answer: B
,11.Who pays the premiums in a Key Person life policy?
Answer: The business
12.A company applies for Key Person insurance on its VP. Who must sign the
application?
Answer: Both the company (as owner) and the VP (as insured)
13.True or False: The insured’s family receives the death benefit in a Key
Person plan.
Answer: False — the business receives the benefit.
14.Why are Key Person death proceeds generally not subject to income tax?
Answer: They are considered insurance protection, not income
15.A bank may require a business to have Key Person insurance as:
Answer: Loan collateral
16.True or False: The premiums for Key Person insurance may be considered a
deductible business expense if the business is a nonprofit.
Answer: False — still not deductible
17.If a business receives $500,000 from a Key Person policy, how is it taxed?
Answer: Proceeds are income tax-free to the business
18.A Key Person policy is considered what type of ownership arrangement?
Answer: Third-party ownership
19.Which of the following could be considered a “key person”?
A) A salesperson who generates 50% of company sales
B) A receptionist
C) Any entry-level employee
D) An intern
Answer: A
20.True or False: Key Person insurance is primarily designed to provide
financial security to the insured’s spouse.
Answer: False
, 21.The main purpose of a Buy-Sell Agreement funded with life insurance is to:
A) Provide retirement income for business owners
B) Ensure business continuity after an owner’s death
C) Pay dividends to shareholders
D) Provide disability income to owners
Answer: B
22.True or False: Buy-Sell Agreements guarantee that heirs of a deceased
owner will be compensated fairly.
Answer: True
23.In a cross-purchase plan, who owns the policies?
Answer: Each business owner on the life of the other owners
24.In an entity-purchase (stock redemption) plan, the policies are owned by:
Answer: The business itself
25.True or False: Premiums paid for Buy-Sell Agreement policies are tax-
deductible.
Answer: False
26.Proceeds from Buy-Sell Agreement life insurance are:
Answer: Income tax-free to the policy beneficiary
27.A Buy-Sell Agreement helps prevent:
A) Sale of the business to outsiders
B) Business interruption due to disputes among heirs
C) Forced liquidation of business assets
D) All of the above
Answer: D
28.Which type of Buy-Sell plan requires more policies when there are multiple
owners?
Answer: Cross-purchase plan
Types of Life Insurance Policies & Provisions / Policy
Ownership & MECs Verified Multiple Choice and
Conceptual Actual Emended Exam Questions With
Reviewed 100% Correct Detailed Answers
Guaranteed Pass!!Current Update
1. The main purpose of Key Person life insurance is to:
A) Replace employee benefits for a deceased worker’s family
B) Provide personal retirement income for executives
C) Protect the business from financial loss due to the death of a key
employee
D) Satisfy ERISA coverage rules
Answer: C
2. True or False: The insured in a Key Person policy names the beneficiary.
Answer: False — the business is beneficiary.
3. In a Key Person policy, the business is usually:
A) The insured
B) The policyowner and beneficiary
C) Only the payor of premiums
D) None of the above
Answer: B
4. Which of the following is a valid use of Key Person insurance?
A) Funding an employee’s personal debts
B) Guaranteeing employee retirement income
C) Training and replacing a valuable executive
D) Funding a worker’s IRA
Answer: C
,5. Premiums for Key Person insurance are generally:
A) Tax-deductible
B) Not tax-deductible
C) Paid with pre-tax dollars
D) Reimbursed by the insured
Answer: B
6. True or False: Death benefits under Key Person insurance are typically
income tax-free to the business.
Answer: True
7. If a key employee leaves the company, the business may:
A) Cancel the policy and receive no value
B) Surrender the policy for its cash value
C) Transfer ownership to the employee
D) Both B and C
Answer: D
8. Which of the following is NOT a purpose of Key Person insurance?
A) Maintain business credit
B) Replace lost profits
C) Pay off the insured’s personal mortgage
D) Cover the costs of hiring and training replacements
Answer: C
9. True or False: Term life insurance is never used for Key Person coverage.
Answer: False — both term and permanent may be used.
10.The amount of Key Person insurance is generally determined by:
A) Federal guidelines
B) Value of the employee to the company
C) Employee’s personal debts
D) Insurer’s suggestion only
Answer: B
,11.Who pays the premiums in a Key Person life policy?
Answer: The business
12.A company applies for Key Person insurance on its VP. Who must sign the
application?
Answer: Both the company (as owner) and the VP (as insured)
13.True or False: The insured’s family receives the death benefit in a Key
Person plan.
Answer: False — the business receives the benefit.
14.Why are Key Person death proceeds generally not subject to income tax?
Answer: They are considered insurance protection, not income
15.A bank may require a business to have Key Person insurance as:
Answer: Loan collateral
16.True or False: The premiums for Key Person insurance may be considered a
deductible business expense if the business is a nonprofit.
Answer: False — still not deductible
17.If a business receives $500,000 from a Key Person policy, how is it taxed?
Answer: Proceeds are income tax-free to the business
18.A Key Person policy is considered what type of ownership arrangement?
Answer: Third-party ownership
19.Which of the following could be considered a “key person”?
A) A salesperson who generates 50% of company sales
B) A receptionist
C) Any entry-level employee
D) An intern
Answer: A
20.True or False: Key Person insurance is primarily designed to provide
financial security to the insured’s spouse.
Answer: False
, 21.The main purpose of a Buy-Sell Agreement funded with life insurance is to:
A) Provide retirement income for business owners
B) Ensure business continuity after an owner’s death
C) Pay dividends to shareholders
D) Provide disability income to owners
Answer: B
22.True or False: Buy-Sell Agreements guarantee that heirs of a deceased
owner will be compensated fairly.
Answer: True
23.In a cross-purchase plan, who owns the policies?
Answer: Each business owner on the life of the other owners
24.In an entity-purchase (stock redemption) plan, the policies are owned by:
Answer: The business itself
25.True or False: Premiums paid for Buy-Sell Agreement policies are tax-
deductible.
Answer: False
26.Proceeds from Buy-Sell Agreement life insurance are:
Answer: Income tax-free to the policy beneficiary
27.A Buy-Sell Agreement helps prevent:
A) Sale of the business to outsiders
B) Business interruption due to disputes among heirs
C) Forced liquidation of business assets
D) All of the above
Answer: D
28.Which type of Buy-Sell plan requires more policies when there are multiple
owners?
Answer: Cross-purchase plan
