Key Man Disability Income Insurance

Key man insurance provides protection for businesses by delivering disability benefits when a critical member of the team goes down. Small businesses in particular rely on one or two key contributors to survive, and if one of those people should become disabled the business will struggle. Key man insurance provides a disability policy that protects the remaining members of the business in order to continue operating or to successfully wind down.

TIP: Any business that would be negatively impacted by the absence of one person should purchase key man insurance to protect itself should that person become disabled.

Key Man Insurance and Small Businesses

Key man insurance is particularly important for the small business owner. Because the success of a small business can depend upon a few employees, the loss of any of them to a disability can be devastating. To protect against this economic loss, a company can purchase key man insurance, pay the premiums, and be the beneficiary if a key employee becomes disabled. The benefit is often a level monthly payment, similar to an individual disability income policy, except that the company, not the insured, receives the benefit. In the event of a disability, the policy specifies that benefits will be paid as long as the key employee cannot perform his or her regular duties. Key man Insurance provides the small business a disability benefit to assist in stabilizing the company financially until the key employee returns or a replacement is hired.

Questions for Businesses Considering Key Person Insurance

If you are considering adding key person insurance to protect your business, you need to know the following:

• Who are the key employees, and what makes them key?
• How hard will it be to locate and train a replacement for each key employee?
• What type of compensation will be needed to hire a replacement?
• What percentage of revenue is directly attributable to the key employee?
• Would the key employee’s disability result in the loss of clients?
• Is the company willing to self-insure rather than purchase a key person insurance policy to protect itself?

Cost of Key Person Insurance

The premium cost for key person insurance is determined by a few factors including:

• The occupation of the key person,
• The benefit amount as determined by the business. This figure can be calculated by looking at the income of the key employee, the cost associated with replacing that employee, and the employee’s contribution to the company’s earnings.
• The length of the benefit payments.

Once the company fills out the key man insurance application, underwriting will request information on the insured employee, and may ask for a medical exam and documentation regarding the financial health of the business prior to setting the premium payment.

Benefit Period for Key Man Insurance

Often, key man insurance policies are custom designed to meet the specific needs of a small business. Typically, these policies provide a very short benefit period, assuming that a capable replacement for the disabled employee can be found within 12 to 24 months. In the event of a claim, either a level monthly benefit or an annual lump sum benefit are the usual payment options.

• Monthly benefit payout: The monthly benefit payout option states that, after the initial elimination (waiting) period, benefits are payable at a set monthly amount for the life of the policy, usually between 6 and 24 months. Both the length of the elimination period (typically between 30 and 90 days) and the length of the benefit period are determined at the time of application for the insurance policy.
• Lump sum benefit payout: This is different than a traditional individual disability income insurance policy. The lump sum benefit approach mandates a longer elimination period than a traditional individual disability insurance policy and is, in fact, a critical part of the policy. The typical lump sum elimination period is 365 days before benefits are paid. At that time, if the key employee still cannot perform his or her regular and substantial duties, the lump sum benefit is paid to the company and the policy terminates.

Incorporating key man insurance into your small business policy could prevent financially devastating sudden absences of critical employees. To get a free quote on disability insurance, click here to take advantage of the Free Advice quote center today.

Case Studies: Key Man Disability Income Insurance

Case Study 1: Stellar Solutions Inc.

Stellar Solutions Inc., a small business in the aerospace technology industry, relied heavily on its founder and CEO, Mark Thompson. To safeguard against the risks associated with Mark’s potential disability, the company secured key man disability income insurance.

Unfortunately, an unforeseen accident left Mark unable to fulfill his duties. However, the key man insurance policy provided Stellar Solutions Inc. with monthly disability benefits, ensuring the company’s stability and enabling them to continue their groundbreaking projects.

Case Study 2: Quantum Innovations Co.

Quantum Innovations Co., a growing technology startup, had a highly skilled research scientist named Dr. Emily Johnson. Recognizing the vulnerability of their business in the event of Emily’s disability, the company obtained key man disability income insurance.

When Emily faced a serious health condition, the policy’s lump sum benefit provided essential financial support. Quantum Innovations Co. utilized the benefit to hire a temporary replacement, allowing them to sustain their research and development efforts seamlessly.

Case Study 3: Smith & Associates Law Firm

Smith & Associates Law Firm relied heavily on their senior partner, David Thompson, for managing complex litigation cases. Understanding the risks associated with David’s potential disability, the law firm acquired key man insurance.

Unfortunately, David suffered a stroke that significantly impacted his ability to practice law. With the key man insurance policy in place, Smith & Associates Law Firm received monthly disability benefits, allowing them to hire additional attorneys to handle David’s caseload and ensure their clients’ needs were met.