Arizona Contractors License Practice Exam

What is the main function of keyman life insurance in a business?

1. To reduce corporate taxes

2. To provide funds for employee training

3. To ensure business continuity in case of key personnel loss

4. To cover operational costs

The correct answer is: To ensure business continuity in case of key personnel loss

Keyman life insurance primarily serves to ensure business continuity in the event of the loss of a crucial employee or owner. This type of insurance provides a financial safety net, allowing the business to cover the costs associated with the loss of that individual, such as hiring a replacement, training new personnel, or even addressing any potential decline in revenue due to the sudden absence of a key player. The policy pays out a death benefit to the company, which can be essential for maintaining operations and stabilizing the business during a difficult transition. While reducing corporate taxes, funding employee training, or covering operational costs might be desirable outcomes for a business, these do not encapsulate the main purpose of keyman insurance. The critical focus of this insurance is tied to risk management related to the loss of key individuals whose unique skills, knowledge, or relationships are pivotal to the company’s success.