What is the primary purpose of key employee life insurance?

The primary purpose of key employee life insurance is to compensate the company for lost profits that may occur due to the untimely death of a vital employee. This type of insurance is designed to protect a business from the financial impact associated with the loss of key personnel, whose skills, knowledge, or leadership are essential to the company's operation and success.

When a key employee passes away, the company may suffer from lost revenues, decreased customer confidence, and added expenses related to finding and training a suitable replacement. The death benefit from a key employee life insurance policy provides the business with the necessary funds to address these challenges, ensuring that operations can continue and that the company remains financially stable.

Other options, such as providing income to the beneficiaries or covering funeral expenses, do not align with the main function of this type of policy. Key employee life insurance primarily serves the interests of the business rather than the personal beneficiaries of the key employee. Additionally, while policy loans can be a feature of certain life insurance products, they are not a fundamental purpose of key employee life insurance.