Key man disability insurance is designed to protect the business in the unfortunate event that a key employee or executive suffers a disabling accident, injury or illness. It provides peace of mind to companies and business owners alike knowing that the business can continue operations without major disruption if a disability strikes a top salesperson, executive or key employee.
How Does A Key Man Disability Insurance Policy 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?
- Where do I locate a competent professional insurance agent that has experience in working with companies such as ours?
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.
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