What is the purpose of key person insurance?

Key person insurance serves as a financial safety net for businesses by providing a lump-sum payment that helps ensure business continuity in the event that a critical employee—often referred to as a "key person"—becomes disabled or passes away. This type of insurance is crucial for companies that rely heavily on specific individuals whose expertise, relationships, or leadership are vital to the operation and success of the business. The proceeds from key person insurance can be used to cover costs related to finding and training a replacement, managing cash flow during the transition period, and retaining the confidence of clients and stakeholders who may be concerned about the future of the company after the loss of such an important figure.

In contrast, the other options do not align with the primary purpose of key person insurance. For example, providing retirement plans for employees, funding bonus programs, or compensating partners for loss of business income are distinct financial strategies that serve different objectives within an organization. These options do not directly address the specific needs and challenges that arise from the absence of a key employee in a business environment.