Which statement is true regarding key person insurance?

Key person insurance, also known as key man insurance, is specifically designed to provide financial protection for a business in the event of the death or disability of a crucial employee, often a top executive or someone whose loss would significantly impact the company. This type of insurance allows a business to cover financial losses that could arise from the absence of this key individual, such as lost revenue, the costs of finding and training a replacement, and maintaining business operations during a transition period.

The coverage is typically structured as a life insurance policy where the business is the beneficiary, ensuring that it receives a payout upon the death of the insured key employee. This helps stabilize the company’s finances and gives it time to adjust to the loss without suffering immediate financial turmoil.

Understanding this concept clarifies why the other statements do not hold true. For instance, key person insurance is not exclusively funded by permanent insurance; it can also use term life policies, making the assertion about it being limited to permanent insurance inaccurate. Additionally, it covers more than just accidental death; it encompasses all forms of death, thereby providing broad coverage. Finally, key person insurance is not designed for short-term coverage, as it is intended to provide long-term financial security over the lifespan of the insured key employee.