Arizona Life and Health Practice Exam

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

1. To mitigate financial losses

2. To ensure business continuity

3. An increase in pension liability if the key person dies

4. To attract new investors or partners

The correct answer is: An increase in pension liability if the key person dies

The choice related to an increase in pension liability if the key person dies is the option that does not serve as a reason for a business to acquire key person life insurance. Key person life insurance is primarily intended to protect a business from the financial repercussions associated with the loss of an essential employee. When a key person passes away, the company could face significant disruptions, including loss of expertise, customer relationships, and overall revenue. The insurance provides funds that can help mitigate these financial losses, thereby ensuring that the business can continue its operations during a challenging transition period. Ensuring business continuity is another vital reason for obtaining this type of insurance, as the payout can be used to cover operational costs, recruit a replacement, or invest in training for existing staff to fill the gap left by the key person. The acquisition of this insurance can also play a strategic role in attracting new investors or partners. Demonstrating that a company has safeguards in place, like key person insurance, can instill confidence in potential stakeholders about the company’s resilience and stability. However, an increase in pension liability is generally considered an independent issue related to retirement benefits and does not directly connect with the rationale for key person life insurance. This option diverges from the primary objectives of such policies