It’s time to clear up some confusion about key person disability insurance premiums. Even though the policy provides coverage for financial losses associated with the disability of an employee, key person disability insurance performs differently than individual disability insurance. Here’s what you need to know about coverage and payments, including how key person disability insurance premiums work under a key person disability income policy.
What Is Key Person Disability Insurance?
Key person disability insurance protects against the economic loss a business may experience when a worker becomes disabled and cannot work as a result.
Key person disability insurance is similar to key person life insurance, but it covers the illness or injury of a worker rather than the death of a worker. A company can have both types of coverage.
Who Receives the Key Person Disability Benefit?
Key person disability insurance benefits go to the employer. If the covered worker cannot work due to a disability, the company will receive benefits under the terms of the policy.
The benefit period is typically 12 to 24 months. Benefits paid during this time can help offset economic losses caused by the loss of a valuable employee. For example, the company may lose clients, see declines in revenue, spend money to recruit a replacement, and incur higher training costs. Key person disability insurance benefits help alleviate the impact on profits.
Who Pays for Key Person Disability Insurance?
The company makes the premium payments for a key person disability income policy. This makes sense because the company owns the policy and will receive benefits if the covered worker experiences a covered disability.
Are Premiums Tax Deductible?
According to Principal, key person disability insurance premiums are not tax deductible. However, any benefits the company receives may be income tax free.
Who Is the Insured?
In some types of policies, the insured and the policyholder refer to the same person or entity. This is not the case with key person disability insurance.
- The policyholder is the person or entity that owns the policy. With key person disability insurance, the company is the policyholder.
- The insured is the person, entity, or property covered by the insurance policy. With key person disability insurance, the worker is the insured.
For example, let’s say Beth is a valuable worker at ABC Company. If she leaves, the company will suffer significant financial loss. Plus, replacing her will be costly. For this reason, ABC Company purchases a key person disability insurance policy on Beth. ABC Company is the policyholder and pays for the premiums. Beth is the insured. If Beth cannot work due to a covered disability, the insurance policy will pay benefits to ABC Company as per the policy terms. The company can use these benefits to cover costs associated with lost revenue and hiring a temporary or permanent replacement.
An employer may decide to take out key person disability insurance on multiple employees. When deciding which employees to cover, employers should consider the following:
- How would the loss of the employee impact revenues? For example, are certain clients likely to leave?
- How would the loss of the employee impact operations? Does the company rely on any unique knowledge, skills, or training the employee possesses?
- How hard will it be to replace the worker, on either a temporary or a permanent basis?
What About the Employee’s Finances?
Key person disability insurance protects the business, not the worker. However, workers also need disability income protection. Companies can help workers (and subsequently their own recruitment and retention efforts) by offering group disability insurance and executive bonus benefits. Individual workers can protect themselves by buying individual disability insurance and supplemental disability insurance.
Protect Businesses with Key Person Disability Insurance
An unexpected disability can be devastating for both the worker and the worker’s company. Disability insurance can help alleviate the financial burden. Key person disability insurance is a smart investment for businesses that depend on certain employees to stay profitable,.
The cost of key person disability insurance premiums will depend on various factors, including the number of employees you need to cover and the size of the benefits.
DIS can help brokers secure and compare quotes for their clients. Learn more about key person disability insurance.