Final answer:
Key person insurance is designed to reduce financial loss for a company in the event of the death of a crucial employee, which could otherwise cause significant disruption to operations and profitability.
Step-by-step explanation:
The reason for key person insurance is to lessen the risk of financial loss due to the death of a key employee. This type of policy helps to provide financial stability and security to a company by compensating for the loss of significant contributions made by a key individual, whose absence could lead to financial strain. Unlike pension insurance which is designed to provide benefits to retirees and is protected by organizations like the Pension Benefit Guarantee Corporation in cases of bankruptcy, key person insurance specifically supports a business in the event of an unforeseen loss of one of its most valuable employees.
Furthermore, reducing moral hazard is a concern for insurance companies, as policyholders might engage in riskier behavior knowing they are insured. While this is more common in other forms of insurance, the nature of key person insurance doesn't typically invite moral hazard to the same extent, since it covers losses from an untimely death rather than risks taken by the insured individual.