Key person insurance protects a business against financial loss caused by the premature death of a critical employee.
Types of losses covered indirectly.
Loss of revenue
Loss of expertise or leadership
Costs associated with:
Recruiting a replacement
Training a replacement
Loss of business continuity
Evaluate each option carefully.
A. Tax deduction
Incorrect. Premiums for key person insurance are generally not tax-deductible.
B. Pay estate taxes for the employee
Incorrect. Estate taxes are a personal matter, not a business obligation.
C. Pay the employee’s mortgage
Incorrect. This is unrelated to the business’s financial exposure.
D. Pay for replacement costs
Correct. This is a classic and legitimate use of key person insurance.
Maryland insurable interest relevance.
Maryland law recognizes that businesses have an insurable interest in key employees whose death would cause economic harm.
Conclusion.
Businesses buy key person life insurance to cover financial losses and replacement costs.
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