Key Person Disability Insurance

    Key Person Disability Insurance: Is It Right For Your Business?

    In the event that one of your top employees becomes disabled, would your company be able to survive? In most cases, this could result in a huge revenue loss and many other problems, especially for small businesses.

    Thankfully, you can prevent your company from going under by getting key person disability insurance. This type of policy provides your business with a financial cushion in case some of your most valuable personnel develop a disability and become unable to work.

    In this guide, we'll talk about the benefits of getting key person disability insurance and how it works. We'll also answer some of the most commonly asked questions on the topic.

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    What Is Key Person Disability Insurance?

    Companies purchase key person disability insurance to offset any revenue loss they might suffer in the event that an important employee becomes disabled. It's also known as "key man insurance" or "key employee disability insurance."

    How likely is it that a key person will be disabled while they're working for your company? Data shows that a 20-year-old has a 26.8% chance of getting disabled for at least a year before reaching retirement age. If they suffer from a long-term disability, this could extend to as many as three years.

    If you want to mitigate the financial impact of losing an important staff member, you need to consider getting key person disability insurance. Disability benefits can be used for the following:

    • Finding a short-term replacement employee with the same level of expertise and similar background
    • Training the replacement employee
    • Paying for overtime work needed to cover for the key employee
    • Covering temporary staffing costs
    • Paying severance to staff members should the business need to close
    • Giving back money to investors and shareholders
    • Offsetting poor cash flow from lost sales
    • Offsetting revenue loss from major projects that involve key employees
    • Enabling shareholders to purchase interest from partners who have left due to a disability
    • Paying off business loans
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    Who Is Considered A Key Person?

    A majority of start-up businesses owe their success to a few key individuals. If these key employees were to stop working, the business' revenue is likely to be severely affected.

    Key persons are not limited to business executives or owners. Other examples of employees you can consider for key person insurance coverage are:

    • Individuals who are responsible for handling and managing key clients
    • Top sales personnel
    • Heads of product development
    • People who are responsible for managing books and finances
    • People who are leading the staff
    • People who have specialized knowledge and experience, where finding a replacement would be expensive for the business 

    How Does It Work?

    With key person disability insurance, the business entity is the beneficiary of the policy and is responsible for paying premiums.

    Typically, a key individual has to be 18-55 years old in order to qualify for a key person insurance policy. The policy can be maintained until the key employee reaches age 60 or leaves the company.

    In order for a business to receive disability benefits, the key employee must have a total disability. This means that they should be under the regular and personal care of a physician. Additionally, they should be unable to perform any of the duties related to their work.

    Key person disability insurance comes with a 60-180 day elimination period, which starts from the day that the employee is certified by a physician to have a disability. During the elimination period, the business will not receive any disability benefits from the insurer. The business is responsible for paying any expenses out-of-pocket during this period.

    Once the elimination period ends, the benefit period begins. This is the length of time that the insurer will pay benefits as agreed upon in your contract. Disability benefits can range from $2,500 to $15,000 per month for an entire year. They typically have an overall benefit limit of up to $500,000.

    In some cases, the life insurance company could allow your business to get a lump sum instead of a monthly payment. Keep in mind that the elimination period for lump sum key person disability insurance policies can be longer, reaching up to 365 days.

    Things To Consider When Buying A Key Person Policy

    If you're a business owner looking for key person coverage, try to look for an insurance policy with the following aspects:

    • Interrupted elimination period: Sometimes, key employees can work for one day a week, then miss the rest of the days. But returning to work even for a day prevents them from completing a consecutive elimination period. If you get a disability policy that allows interrupted elimination periods, the non-consecutive days of disability count towards the total elimination period.
    • Benefit payment method: Usually, the insurance company can pay benefits monthly or as a lump sum. If the absence of a key individual spells significant losses for your business in the short-term, it's best to get monthly payments.
    • Waiver of premium: This allows the business to stop or "waive" premium payments during the benefit period.
    • Guaranteed premiums: This provision prevents the insurance company from driving up the cost of premiums.
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    Frequently Asked Questions On Key Person Disability Policies

    Getting key person disability insurance is a major business decision. Before signing a contract, it's best to learn as much as you can about this type of policy. To help you with this, we've answered some of the most common questions on the topic.

    Is key person disability insurance different from key person life insurance?

    Both of these are considered corporate-owned life insurance (COLI), but there are a few key differences. For key person life insurance, the insured employee needs to pass away before the company can receive the lump sum death benefit. Proceeds from key person life insurance are typically tax-free.

    On the other hand, the key personnel only needs to be chronically ill or severely injured to get benefits from a key person disability policy.

    Are there exclusions for key person disability insurance?

    Typically, insurance companies will not provide disability benefits if the key employee gets injured from engaging in crime, acts of war, personal hobbies, and self-harm. Disabilities caused by preexisting health conditions are also excluded from the policy.

    How much insurance coverage does my company need?

    You can calculate how much coverage you need by estimating the financial loss that your company might suffer if a key person becomes disabled. You should also check the costs involved when it comes to recruiting, hiring, or training a replacement. If you need help, some insurance companies have formulas that help you estimate the costs of losing a key individual.

    There's no strict rule as to how much coverage is needed. The best rule of thumb? Get a coverage amount that comes with premiums your company can afford. We’d recommend working with a qualified life insurance agent to get quotes for varying coverage levels.

    What factors affect the cost of key person coverage?

    The rate of premiums for key person coverage depends on a variety of factors, such as:

    • Length of the elimination period: The longer the elimination period, the lower the premium.
    • Length of the benefit period: The longer the benefit period, the higher the premiums.
    • The key person's salary: Premiums are more expensive for employees with higher salaries.
    • Business structure and size: The cost of insurance is higher for businesses with high company value and profitability.
    • Revenue generated by the key person: Premiums increase depending on the revenue tied to the person insured.
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    Final Thoughts

    Getting key person disability insurance is an excellent way to protect your business from any financial strain that comes with the loss of a key individual or asset. To ensure your success, this type of policy should play a part in your business continuity plan.

    If you want more information on this type of insurance, get in touch with Wesley Insurance, LLC. We'll help you assess your business insurance needs and look for the best policy.

    Written By Cameron McDowell
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