Disability Insurance to Protect Business Owners

Disability insurance can help protect business owners through key person disability insurance and disability buy-sell agreements.

Questions answered in this article:

Who is considered a key person?
What is key person disability insurance?
What is key person life insurance?
What is a disability buy-out agreement?

Most smart business owners will admit that it’s their employees that are the backbone of the company. They may even admit that there are specific employees that, without them, their business would take a hit. It’s these specific employees that can be considered key persons.

Which employees are considered a key person?

Key persons exist in all companies, and are not defined by occupation, salary, or title alone. Key persons may be employees or employers. Their performance and value dictate the success or failure of companies.

Typically, we consider key employees to be top sales people who hold large accounts or executives that maintain important business relationships. While this may statistically be the most common use for key person disability insurance, it is not the rule.

A key employee is anyone who provides significant value to a company and whose long-term absence would cause significant loss to that firm.

Examples of key employees include:

A well-known doctor or surgeon who attracts patients.
A hairstylist who is on the cutting edge of fashion.
A stock market expert who seemingly can foresee the future.
An entertainer whose popularity brings in the crowds.
An architect whose unique designs are in high demand.
An internet technician who single-handedly supports a company’s companies network.
A chef whose menu creates a line around the block.
A dentist whose charisma keeps her clients smiling.

The loss of a key person can be devastating, not only affecting the profitability of the firm, but also productivity, customer relations, employee morale, and the general overall effectiveness of the firm.

What is key person disability insurance?

Key person disability insurance provides financial protection for the company if a key person were unable to work due to a disability. Key person coverage provides cash flow to help companies move forward and maintain a profit in the event that a key employee becomes disabled.

The most common uses for key person disability benefits are:

to cover expenses of a recruiter to find a replacement,
to reimburse losses due to reduced productivity,
to provide travel expenses for a new account manager to meet with clients, and
to supplement overtime payments for the existing staff to cover the additional workload.

Unlike a personal individual disability insurance policy, the business buys a key person disability insurance policy. The business pays the premiums and is the beneficiary. If the key person becomes disabled and can’t work, the business receives benefits.

The cost of a key person disability insurance policy is based on the employee’s age, gender, occupation, tobacco status, and state of residence.

Features of a Key Person Disability Insurance Policy

Elimination Period

The elimination period is the time which must pass after the date of the injury or sickness, prior to the business receiving benefits. A variety of elimination periods are available. The most common are 30, 60, 90, or 180 days.

Benefits

Benefits can be paid in a lump sum or a combination of monthly and lump sum, and are generally received income tax-free. The benefit period is the number of months that benefits are payable during a period of disability. Benefit periods may range from six months to age 65.

Presumptive Disability

If the covered employee loses the use of both hands, or both feet, or one hand and one foot, or the sight of both eyes, or the hearing of both ears, or the ability to speak, this is considered a presumptive disability. A presumptive disability is exempt from an elimination period. The monthly benefit will be paid for the entire benefit period or as long as the loss exists.

Recurrent Disabilities

If after a period of total disability, the employee returns to work full-time and within six months are disabled again, the policyowner has two options: continue the previous claim without the need for a new elimination period or choose to have a new elimination/benefit period. Once a period of six months has passed after returning to work, any new claim will have a new elimination and benefit period.

For more information about disability insurance, check out our Individual Disability Insurance page.