Massachusetts Life Producer Practice Exam

Which of the following is NOT a reason for a business to buy key person life insurance?

1. To cover lost income due to the key person's absence

2. To attract potential investors

3. An increased pension liability if the key employee dies

4. To cover expenses related to recruiting a replacement

The correct answer is: An increased pension liability if the key employee dies

Key person life insurance is designed to protect a business from the financial consequences associated with the death of a crucial employee whose skills and contributions are vital to the company’s ongoing success. The purpose of this insurance is primarily focused on mitigating the immediate financial impact caused by the loss of that employee. One of the reasons businesses opt for key person life insurance is to cover lost income due to the key individual's absence. This coverage ensures that the business has the necessary funds to maintain operations while dealing with the loss. Attracting potential investors is another valid reason, as demonstrating that the business is protected against key losses can instill confidence in investors regarding the company’s stability and management. Additionally, covering expenses related to recruiting a replacement is also a legitimate consideration, as finding and training a new employee takes both time and financial resources. In contrast, an increased pension liability resulting from the death of a key employee is not typically a direct reason for purchasing key person life insurance. Pension liabilities are generally associated with retirement benefits and obligations, rather than the immediate impact of losing a key employee. The focus of key person life insurance is more on the operational and financial losses directly tied to the employee’s contributions rather than long-term pension liabilities. Therefore, that option does not align with the