Accredited Wealth Management Advisor Practice Exam

Which of the following statements describes the advantages of using life insurance in a nonqualified deferred compensation plan?

1. It offers straightforward administration due to direct payments.

2. It can fund a death benefit immediately.

3. It allows significant tax deductions for the employer.

4. It avoids the need for any formal contracts.

The correct answer is: It can fund a death benefit immediately.

Using life insurance in a nonqualified deferred compensation plan provides various advantages, and one of the most significant is its ability to fund a death benefit immediately. This means that in the event of the insured's death, beneficiaries or the designated party can receive the death benefit without delay. This immediate funding provides financial security to dependents or beneficiaries, ensuring that they have access to the funds at a critical time. Given the nature of nonqualified deferred compensation plans, which are typically designed to compensate select employees at a later date, the immediate availability of a death benefit from the life insurance component adds a layer of protection and value for both the employer and the employee. The employer can enhance the appeal of the compensation package, while employees gain peace of mind knowing their loved ones will be financially supported. The other options do not reflect the primary advantages of using life insurance in this specific context. For instance, while straightforward administration and formal contracts are indeed important considerations in any financial arrangement, they are not direct advantages of using life insurance itself. Additionally, significant tax deductions for the employer may not apply in the same way as with other financial products, making this feature less relevant compared to the immediate funding aspect of the death benefit.