A small firm wants to continue paying an employee's salary to the employee's surviving family for a period after the employee dies. Which business life insurance arrangement best fits this goal?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Salary continuation (wage continuation) uses life insurance to replace the income an employee would have provided to his or her family, so the employer pays a continuing salary for a stated period after the employee's death. The policy is usually owned by the employer, with the benefit structured to match the promised continuation. This is distinct from deferred compensation, which funds future retirement income for a living executive; from business overhead expense coverage, which pays the firm's operating expenses during disability; and from buy-sell funding, which provides cash for surviving owners to purchase a deceased owner's interest.
Why the other options are wrong
- B) Deferred compensation funds retirement income for a living executive, not salary payments to a deceased employee's family.
- C) Business overhead expense insurance pays the firm's fixed operating expenses during an owner's disability, not family income after death.
- D) Buy-sell funding provides cash for surviving owners to buy the deceased's business interest, not family income continuation.
Memory hook
Salary continuation keeps the paycheck flowing to the family when the worker is gone.