Difficulty: Easy

Average Score: 100%

Which of the following would NOT be an appropriate use of life insurance for business purposes?

Rationale

To provide the company with capital on the death of entry-level employees.

Life insurance is typically utilized to mitigate financial risks associated with key personnel in a business. However, insuring entry-level employees is generally not a strategic use of life insurance because their absence does not typically create a significant financial burden for the company.

A (To protect the business from the premature death of a key employee.) YOUR ANSWER

Insuring key employees is a common and appropriate use of life insurance in business. The death of a key employee can have substantial financial implications, including loss of expertise, relationships, and revenue. Life insurance provides the necessary funds to help the business recover from such a loss.

B (To attract employees through a voluntary employee group life plan.) YOUR ANSWER

Offering a group life insurance plan is a strategic way to enhance employee benefits, making the company more attractive to potential hires. This not only helps in employee retention but also improves overall job satisfaction, thus serving a beneficial purpose for the business.

C (To provide the company with capital on the death of entry-level employees.) CORRECT

Insuring entry-level employees is generally seen as impractical since their contributions do not typically warrant the financial protection that life insurance provides. Their loss does not usually result in significant financial strain on the business, making this an inappropriate use of life insurance.

D (To fund an entity buy-sell agreement.) YOUR ANSWER

Life insurance is commonly used in buy-sell agreements to ensure that, upon the death of a business owner, the remaining owners can buy out the deceased's share without financial strain. This is a well-established and appropriate application of life insurance in business settings.

Conclusion

Life insurance serves various strategic purposes in business, primarily focusing on key personnel and enhancing employee benefits. Among the options provided, the use of life insurance for entry-level employees does not align with common business practices, as their death does not create a significant financial liability. Therefore, options A, B, and D represent appropriate uses of life insurance, while option C stands out as the exception.

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