What is the primary purpose of key person insurance?

The primary purpose of key person insurance is to provide financial benefits in the event of a key person's death. This type of insurance is designed to mitigate the financial impact that the loss of a vital employee—such as a founder, executive, or other critical personnel—can have on a business. The death of a key person can disrupt operations, lead to a loss of revenue, and create challenges in securing financing or maintaining relationships with clients, suppliers, and investors.

The policy ensures that the business can receive a lump sum payout when a key individual passes away, which can be utilized to cover operational costs, recruit and train a replacement, or pay off debts that may arise from the transition. This financial cushion is crucial for maintaining stability and continuity within the organization during a challenging time.

In contrast, other options do not capture the core function of key person insurance. Funding retirement plans or insuring all employees addresses broader employee benefits and does not specifically relate to the unique risks associated with the loss of a key individual. Similarly, enhancing credit ratings is more about overall financial health rather than directly linked to the losses associated with losing key personnel.