Key Person Disability Insurance

Businesses depend on the people who run them. This isn’t just the business owner: key employees may play a critical role in the company’s day-to-day operations and capability to make a profit. What happens when one of these key employees suddenly has to stop working due to a disability? Key person disability insurance can help the business navigate this difficult time and cope with the financial impact.

It is the company (rather than the employee) that owns the key person disability insurance policy and receives the benefits. The company decides which key employee (or employees) to insure. If a covered employee is unable to work due to a covered disability, the company receives a disability income payment, according to the terms of the policy.

This payment can compensate for the employee’s absence by making up for lost revenue or covering the cost of hiring and training a temporary replacement worker. Key person disability coverage is designed to provide short-term coverage. Policies typically provide benefit periods of 12 to 24 months. This gives the disabled employee time to recover and return to work or, if that is not possible, for the company to make other arrangements.

Key person disability insurance provides disability benefits to the company if a covered employee cannot work because of a covered disability. Key person life insurance, on the other hand, provides a payment to the company if a key employee dies.
Business owners who want to buy key employee life insurance but not key person disability insurance may be interested to learn that the risk of disability is greater than the risk of death for working-aged individuals.
According to the Social Security Administration, approximately one in four of today’s 20-year-olds will become disabled before reaching age 67, whereas approximately one in eight will die before reaching age 67.
Companies can protect their financial interests by purchasing both types of key person coverage. This way, they’ll be covered no matter whether the sudden loss of an employee is due to disability or death.

A key employee is anyone critical to the company’s operations. If the company would suffer financial harm by the sudden disappearance of a particular worker, that person may be a key employee.
For example, a key employee might be a top sales professional who manages high-value accounts and has developed personal relationships with important clients. If this employee suddenly left, the company may lose some of these accounts, which would hurt the company.
A key employee could also be a worker with specialized knowledge. For example, if only one person at a company knows how to perform critical tasks or maintain critical equipment, that person is likely a key employee.
A company may decide it needs to cover only one employee with key person disability insurance or it may decide to insure two or more key workers.

When deciding whether you need to cover an employee, ask yourself the following questions:

If this employee unexpectedly had to stop working, how would this impact business operations? Would it be impossible to carry out critical functions?
How would it impact client relationships? Would the company be at risk of losing important clients?
How long would it take to hire and train a new worker? How hard it would be to find a worker with the right skills and experience?
How would it financially impact the company? How much might the company lose in lost accounts and revenue?

Key person disability insurance provides compensation to the company to help cover associated business expenses. It does not provide a disability benefit to the disabled worker to make up for lost income.
When a worker becomes disabled and can no longer work, both the worker and the company may suffer financially. It’s possible to buy disability insurance to protect both the company and the worker, but you’ll need separate policies.
First, the company should buy a key person policy.
Second, employees should secure disability income insurance. If they experience a disability, their disability insurance policy will provide a payout to replace some of their lost income, as per the terms of the policy.
There are several options for disability insurance for workers. Employers sometimes provide group long-term disability insurance as an employee benefit. For employee groups of five or more, it’s also possible to secure guaranteed issue disability insurance. Workers can also purchase individual disability insurance on their own. This can supplement a group disability insurance policy or secure coverage for workers when an employer does not offer disability income insurance.

Key person disability insurance provides important protection, but it’s not the only disability policy a company might need.

Business overhead expense insurance provides coverage in case the business owner becomes disabled. A BOE policy can help cover many business expenses, including rent, utilities, salaries, payroll taxes, property taxes, and office equipment expenses. This is short-term coverage with a typical benefit period of 12 to 24 months.
Bank loan disability insurance provides coverage for bank loan payments if the business owner becomes disabled.
Disability buy–sell insurance can fund a disability buy–sell agreement. Many businesses are owned by two or more business partners. If one of these partners can no longer work due to a disability, the other business partners may want to buy out the disabled partner. A disability buy–sell insurance policy can help with the funding for this.
If a business owner, partner, or employee becomes disabled, disability income insurance can replace a portion of the person’s lost income. Business owners should consider buying individual disability insurance for themselves and may want to offer coverage to workers as an employee benefit. Multi-life disability insurance discounts are available to cover multiple people at once.

Cancer, stroke, heart attacks, injuries, and other disabilities can be serious threats to workers and the businesses that depend on them. Business leaders should consider how a disability could impact their operations and purchase the appropriate coverage.
Insurance agents can help their business owner clients by providing them with disability insurance options, including key person disability insurance. Education is also important – as business leaders may not understand the risks and their coverage options, insurance agents need to supply this information and help business owners make informed coverage decisions.

Help business owners see the value of key person disability insurance, also called key man disability insurance, by highlighting these advantages:

Cover unexpected recruitment, hiring and training costs. The hiring process eats up time and money. A key person insurance payout can offset the costs.
Make up for losses caused by the sudden absence of a worker. Delayed projects, lost clients, system breakdowns and other losses can occur in a critical employee’s absence. The key person disability payout can help businesses recover from these setbacks.
Make your business more attractive to stakeholders. If a business is applying for a loan, looking for investors and trying to negotiate a business deal, having key person insurance in place can help demonstrate financial stability.
Buy guaranteed standard issue key person disability insurance to cover multiple employees with no medical underwriting. For businesses with multiple critical workers, this is the easy way to secure coverage.

Key Person Disability Insurance