Certified Financial Consultant (CFC) Practice Exam

What is the function of key person insurance?

1. To insure inventory against theft

2. To reduce the risk of financial loss due to the death of a key employee

3. To provide life insurance benefits to employees

4. To serve as a retirement plan for executives

The correct answer is: To reduce the risk of financial loss due to the death of a key employee

Key person insurance is specifically designed to mitigate the financial impact that a business might experience due to the loss of a vital individual, often due to their death. This type of insurance is focused on the key employees whose expertise, experience, or leadership significantly contribute to the company's success. When such an essential employee passes away, the organization may face unexpected challenges, including loss of revenue, decreased productivity, or the cost of recruiting and training a replacement. By having key person insurance in place, the business receives a payout that can be used to cover immediate financial strains, such as lost revenue, expenses associated with finding a replacement, or even settling debts. This financial cushion allows the company to stabilize during a transition period, ensuring longevity and continued operation in a challenging time. In the context of the other options, inventory insurance pertains to physical goods; providing life insurance benefits to employees does not focus on the financial risk of losing a key individual; and serving as a retirement plan for executives isn’t aligned with the specific purpose of key person insurance. Thus, the function of key person insurance is clearly to protect businesses from financial loss linked to the death of crucial personnel.