A small business owner in California wants to purchase a life insurance policy on a key executive, with the executive's written consent, to protect the business from financial loss if the executive dies. The business will be the policy owner and beneficiary. What type of contractual arrangement does this scenario represent?
Correct
The answer is C: A third-party ownership contract
A third-party ownership contract exists when the policy owner is someone other than the insured. In this case, the business is the owner, and the executive is the insured. In California, a policy that an employer buys on an employee and names itself beneficiary of is allowed only on an exempt employee, such as an executive (Ins. Code §10110.4), and the employer must get the employee's written consent (Ins. Code §10110.1(c)). A collateral assignment is different, involving the policy as security for a loan. A group life policy covers many individuals under one master contract, which isn't the primary characteristic here. Participating policies relate to dividends, not ownership structure.
Why not ?
Reviewed in our October 2026 California fact-check.
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The answer is C: A third-party ownership contract
A third-party ownership contract exists when the policy owner is someone other than the insured. In this case, the business is the owner, and the executive is the insured. In California, a policy that an employer buys on an employee and names itself beneficiary of is allowed only on an exempt employee, such as an executive (Ins. Code §10110.4), and the employer must get the employee's written consent (Ins. Code §10110.1(c)). A collateral assignment is different, involving the policy as security for a loan. A group life policy covers many individuals under one master contract, which isn't the primary characteristic here. Participating policies relate to dividends, not ownership structure.
Reviewed in our October 2026 California fact-check.
