What is the main purpose of key person insurance?

What is the main purpose of key person insurance?

• A. To insure the lives of all employees
• B. To protect against the loss of a critical employee
• C. To provide health benefits for employees
• D. To cover business property damages

Answer: (B)

Key person insurance is specifically designed to protect a business from the financial impact of losing a crucial employee who contributes significantly to the company's success, often due to sudden death or disability. The primary goal of this insurance is to ensure that the business can continue operating smoothly despite the absence of that key individual. The funds from the key person insurance policy can be used to cover costs associated with hiring a replacement, offset lost revenue during a transition period, or stabilize the company while it adjusts to the loss. Other options do not align with the essence of key person insurance. Insuring the lives of all employees does not focus on the critical role of specific individuals, while providing health benefits pertains to employee welfare rather than business continuity. Covering business property damages falls outside the purpose of key person insurance, which centers on human capital rather than tangible assets.

Key person insurance is specifically designed to protect a business from the financial impact of losing a crucial employee who contributes significantly to the company's success, often due to sudden death or disability. The primary goal of this insurance is to ensure that the business can continue operating smoothly despite the absence of that key individual. The funds from the key person insurance policy can be used to cover costs associated with hiring a replacement, offset lost revenue during a transition period, or stabilize the company while it adjusts to the loss.

Other options do not align with the essence of key person insurance. Insuring the lives of all employees does not focus on the critical role of specific individuals, while providing health benefits pertains to employee welfare rather than business continuity. Covering business property damages falls outside the purpose of key person insurance, which centers on human capital rather than tangible assets.