An architecture firm would stand to lose a lot of money in the event of the death of its project manager. Which type of policy should the firm purchase on its project manager?

 Options:

A) Universal life insurance B) Key Person insurance C) Graded insurance D) Executive insurance

The Correct Answer Is:

• B) Key Person insurance

Answer Explanation:

Key Person insurance, also known as key man insurance, is a type of life insurance policy that a company takes out on an employee who is vital to the company’s success.

In the case of an architecture firm, the project manager is likely a key person as they are responsible for overseeing and coordinating the various aspects of a project.

If the project manager were to die, the company would suffer a significant financial loss due to the disruption of the project and the cost of finding and training a replacement.

Key Person insurance helps protect a company against this financial loss by providing a financial payout to the company in the event of the key person’s death.

This payout can be used to cover the costs of finding and training a replacement, as well as any other costs associated with the disruption of the project.

Overall, purchasing Key Person insurance on the project manager is a smart financial decision for the architecture firm.

It helps protect against the financial loss that would result from the death of the project manager and ensures that the company is able to continue operating smoothly.

In addition to the financial protection provided by Key Person insurance, it can also provide peace of mind for the company and its employees.

The loss of a key person can be a traumatic event for a company, and the financial stability provided by Key Person insurance can help the company navigate through this difficult time.

It’s important to note that Key Person insurance is not just for high-level executives or top-performing employees. Any employee whose role is vital to the company’s success and operation can be considered a key person.

In the case of an architecture firm, this could also include design team leaders or other key personnel involved in the project.

Purchasing Key Person insurance is a smart financial decision for any company, and it is especially important for small businesses that may not have the financial resources to weather the loss of a key employee.

By investing in Key Person insurance, a company can protect itself against the financial and operational impacts of the loss of a vital employee.

Explanation of Other Options:

A) Universal Life Insurance:

Universal life insurance is typically a personal life insurance policy that provides a death benefit to the insured person’s beneficiaries. It is not designed to protect a business or firm against the loss of a key employee.

While a project manager may have a personal universal life insurance policy, it does not directly address the firm’s financial risks associated with their loss.

Universal life insurance focuses on providing a benefit to the individual’s beneficiaries and may not provide the necessary financial support for the business.

C) Graded Insurance:

Graded insurance is a type of life insurance that typically offers coverage to individuals with pre-existing health conditions or high-risk factors. It is not related to protecting a business against the loss of a key employee.

Graded insurance policies are designed to manage personal health-related risks and may not address the specific needs of a business or architecture firm in the event of a project manager’s death.

D) Executive Insurance:

Executive insurance can refer to various types of insurance policies that cater to the needs of executives within a company. While it may provide benefits to individual executives or key employees, it does not specifically address the financial risks faced by the architecture firm as a whole due to the loss of its project manager.

Executive insurance policies can include a range of coverages, such as disability insurance or life insurance for executives, but they do not provide the comprehensive protection for the firm’s operations that Key Person Insurance does.

In summary,

Key Person Insurance is the most appropriate choice for an architecture firm to protect itself against the financial impact of the death of its project manager.

It addresses the firm’s specific needs by providing financial support to cover recruitment costs, client retention, debt obligations, and the transition period after the loss.

Other insurance options, such as universal life insurance, graded insurance, and executive insurance, do not offer the same level of business-focused protection required in this scenario.

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• All insurance is based on a principle called division of risk.