What does key person insurance protect against?

Key person insurance is specifically designed to address the financial impact that a business may face due to the death or disability of a crucial employee, often referred to as a key person. Key individuals in a company could include top executives, salespeople, or other essential personnel whose expertise, experience, or relationships are critical to the organization's success.

This type of insurance provides a financial safety net for the business, allowing it to recover from the loss by funding operational costs, recruiting and training replacements, or covering any interim loss in revenue that may occur as a result of that individual's absence. The payout from a key person insurance policy can ensure business continuity, mitigate financial strain, and support the organization during a critical transition.

The other options do not align with the primary purpose of key person insurance. Financial loss caused by a lawsuit deals with legal risks rather than employee loss. Liability from employee misconduct relates to the company’s responsibility for an employee's actions, which is not what key person insurance addresses. Higher compensation for key employees pertains to remuneration structures within the company, which is a different aspect entirely from the protective aims of key person insurance.