Tennessee Life Producer Practice Exam

Which statement regarding third-party ownership of a life insurance policy is true?

1. It is used primarily for personal insurance needs

2. It is used extensively in estate-planning as well as business circumstances

3. It is generally not recommended for family policies

4. It is only applicable to commercial properties

The correct answer is: It is used extensively in estate-planning as well as business circumstances

Third-party ownership of a life insurance policy refers to situations where someone other than the insured is the policyholder. This arrangement is particularly useful in both estate planning and business contexts. In estate planning, individuals often purchase life insurance policies to ensure that their beneficiaries receive funds to cover estate taxes or provide financial support upon their passing. By utilizing third-party ownership, the insurance can strategically fund various aspects of the estate, making it an essential tool. In business scenarios, businesses might take out life insurance policies on key employees, known as key person insurance, to safeguard against the financial impact of losing an irreplaceable employee. Additionally, business owners might use policies to fund buy-sell agreements, ensuring that the business can continue smoothly after an owner’s death. The other options do not accurately reflect the broader applications of third-party ownership. For instance, personal insurance needs are typically addressed through individual policies rather than third-party ownership. Similarly, while family policies may function effectively when owned by family members, third-party ownership is often discouraged in those situations due to potential complications around familial rights and interests. Lastly, the concept is not limited to commercial properties; it holds relevance across both personal and business domains.