Connecticut Life Producer Practice exam

What is the primary purpose of key-person insurance?

1. To provide a retirement fund for key employees

2. To minimize financial loss from the death of a specialized employee

3. To insure all employees equally

4. To cover business operational costs

The correct answer is: To minimize financial loss from the death of a specialized employee

Key-person insurance is specifically designed to address the financial impact on a business resulting from the loss of a key individual, typically an employee who plays a significant role in the company's success, such as a top executive or a specialized employee with unique skills. The primary purpose of this type of insurance is to provide the company with funds that can help minimize the financial loss that occurs when a critical person in the organization passes away. This insurance policy helps ensure that the business can continue to operate during a difficult transition, as the funds can be used to cover various expenses, including hiring a replacement, retraining staff, or addressing the temporary drop in revenue that may occur because of the loss. The focus here is on replacing lost value and providing a cushion for the business while it adjusts to the new circumstances. The other answer choices do not accurately reflect the main role of key-person insurance. For instance, while some might consider insurance that supports retirement funds or operational costs, key-person insurance is distinct in its purpose of specifically mitigative financial loss related to the absence of highly valuable personnel.