Chartered Life Underwriter Practice Exam 2025 - Free CLU Practice Questions and Study Guide

The main purpose of key person insurance is to protect a business from the financial impact of losing key personnel. This type of insurance is designed to provide financial support to a business in the event that a critical employee (the "key person") passes away or becomes disabled. The death or departure of such an individual can lead to significant financial strain due to the loss of their expertise, relationships, and contributions to the company's operations.

By having key person insurance, a business can receive a payout that can help manage expenses during a difficult transition period, cover any potential loss of revenue, and allow the company to invest in recruiting and training a replacement. This protection is essential, especially in small businesses where the reliance on certain individuals can be particularly high.

The other choices, while important concepts in business and financial planning, do not encompass the primary function of key person insurance. For instance, while funding a buy-sell agreement among partners is a crucial financial consideration, it pertains specifically to the ownership structure of a business rather than the protection of the business itself from the loss of key personnel. Similarly, providing a retirement income to a key person or compensating for lower employee morale do not directly relate to the purpose of this specific type of insurance. The focus remains on ensuring