Certified Financial Consultant (CFC) Practice Exam

What is a key purpose of a key person insurance policy?

1. To provide funds for employee bonuses

2. To pay for the cost of training a replacement

3. To secure a loan for the business

4. To cover overhead expenses

The correct answer is: To pay for the cost of training a replacement

The primary purpose of a key person insurance policy is to help a business manage the financial impact of losing a vital employee, such as an executive or a salesperson whose unique skills and contributions significantly influence the company's success. When that key person passes away or becomes incapacitated, the insurance policy provides the necessary funds to cover various expenses that may arise. Focusing on the need for training a replacement, the funds from the insurance can be allocated to recruiting and training someone who can take over the key person's responsibilities. This transitional period can be costly, and by having a key person insurance policy in place, the organization can ensure it is financially equipped to bring in and train a suitable replacement without compromising ongoing operations and stability. The other options, while they may represent legitimate business expenses, do not directly align with the immediate purpose of a key person insurance policy. For instance, while the policy may indirectly help to cover overhead costs or secure a loan, it is specifically designed to mitigate the disruption and financial loss associated with the loss of a key employee by providing immediate liquidity for necessary operations, including replacement training costs.