South Carolina Insurance Practice Exam

What types of life insurance are normally used for key employee indemnification?

1. Universal life insurance

2. Term, whole, and universal life insurance

3. Variable life insurance

4. Only term life insurance

The correct answer is: Term, whole, and universal life insurance

Key employee indemnification, also known as key person insurance, is a crucial aspect of business risk management. It involves obtaining life insurance on individuals who are critical to the success and operation of the business. When these key employees pass away or become incapacitated, the insurance proceeds can help the business cover the financial impact of their loss. Several types of life insurance can be used for this purpose: term life insurance, whole life insurance, and universal life insurance. Term life insurance is often used because it tends to be more affordable, providing coverage for a specific period. If the key employee passes away during the term, the business receives a death benefit, which can be used to replace the lost income, recruit a replacement, or cover other potential expenses. Whole life and universal life insurance also serve this function, offering permanent coverage, which can be beneficial for long-term planning. Whole life insurance provides a guaranteed death benefit and a cash value component that grows over time, whereas universal life insurance offers flexible premiums and potential cash accumulation. Using a combination of these types of policies allows businesses to tailor their risk management strategies based on financial budgets, coverage needs, and the duration of risk associated with their key employees. Therefore, the answer encompasses a broader range of suitable options