Massachusetts Health & Accident Insurance Practice Exam

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What is the primary function of key person disability insurance?

  1. To compensate shareholders for losses

  2. To help business in hiring new personnel

  3. To provide financial support during the absence of key personnel

  4. To give employees retirement plans

The correct answer is: To provide financial support during the absence of key personnel

The primary function of key person disability insurance is to provide financial support during the absence of key personnel. This type of insurance is specifically designed to protect a business against the loss of a key employee who is unable to perform their duties due to a disability. The financial benefits from the policy can help cover the company's operating expenses, implement a recruiting strategy to find a suitable replacement, and ensure the business can continue its operations without experiencing severe financial strain. This insurance is crucial because key employees often possess unique skills, insights, or relationships that are vital to the business's success. By securing financial support during their absence, the company can maintain stability and continue functioning effectively until the key person returns or a replacement is found. In this way, key person disability insurance serves as a vital risk management tool for businesses.