 How
Does Key Man Disability Insurance Work?
Important
Key Person Disability Questions
Key
Man Disability Plan Options
How Does Key Man Disability Insurance Work?
Key man disability insurance is purchased on one or more
key people in a business to protect the business from the
economic loss associated with the disability of a key employee.
The company buys the insurance and is also the beneficiary
of any proceeds should a disability arise. If disability
occurs, benefits will be paid, based on the terms of the
policy, as long as the key employee cannot perform the
regular and substantial duties of his regular occupation.
The funds can be used at the company’s discretion
to stabilize the company until a replacement employee can
be located.
Important Key Person Disability Questions
Some important questions business
owners should ask when considering key person disability
insurance include:
-
What are the contingencies for the
company if a key employee is disabled?
- How hard will it be to locate and train a replacement?
- What type of compensation will it take to hire the new
employee
- What percentage of revenue is directly attributable to
the key person?
- Would the key person’s disability result in the
loss of clients?
- Is the company willing to self-insure? For more details
see, “Key Man Life and Disability Insurance Alternatives”.
- Where do I locate a competent professional insurance
agent that has experience in working with companies such
as ours? See “MEG Testimonials”.
Key Man Disability Plan Options
Key man disability policies are not readily available with
traditional disability income insurance providers so unlike
individual disability income polices, they have limited policy
features and options. In most cases, these policies are custom
designed, within contractual guidelines, to meet specific
company needs. These policies are very short term in nature
as it is assumed that a capable replacement can be found
within 12-24 months. In the event of a claim, there are two
benefit payment options: a monthly benefit and an annual
lump sum benefit.
Monthly benefit payout. The monthly payout option states
that after the initial, elimination period of 30-90 days,
benefits are payable at a monthly stated amount for the life
of the key man disability policy which is usually 6-24 months
depending on the company’s need.
Lump sum benefit payout. The lump sum benefit payout option
requires a longer elimination period, usually 365 days before
disability income benefits are paid. At that time, if the
key employee cannot perform the regular and substantial duties
of his regular occupation, the lump sum benefit is paid to
the company and the policy terminates.
The monthly benefit or lump sum benefit amount is determined
by a number of factors including the income of the key executive,
the replacement costs associated with hiring and training
a capable replacement and the key person’s contribution
to the company’s earnings. Financial documentation
to support the need for key man disability insurance will
be required for every case.
Other Disability Income Insurance Resources:
|
