Key Person Insurance: 3 Types Of Coverage To Know
Many businesses have executives or personnel that are irreplaceable or at least very difficult to replace. This is especially true for small businesses and startups.
These individuals are referred to as key people. The partners who own a business are key people. The top salesperson who generates a bulk of your companyâs revenue would also be considered a key person. The lead programmer of your companyâs multimillion-dollar proprietary software is a key person, or the renowned chef at your upscale restaurant.
These are professionals whose absence would have a severe financial impact on your business. Their knowledge, creativity, skills, and/or reputation are critical to the viability of your company.
If you have key people in your firm, there are three types of insurance your company should have to protect itself against the potential loss of these professionals:
Read on to learn more.
Key Person Insurance & How It Can Help Your Business
Unlike personal life and disability insurance, the business buys a key person policy, pays the premiums and is the beneficiary. If the covered employee dies, the;
May 26, 2020 Key person insurance is a disability insurance policy that a business takes out on an essential team member. In this setup, the business acts as;
Key person insurance is a life insurance policy that a company purchases on an The company is the beneficiary of the policy and pays the premiums. In addition to life insurance, key person insurance is also available as disability coverage provide severance benefits to employees, and close the business down in an;
Key person insurance protects a business against the death or disability of an If the insured dies during the policy period the insurer pays a death benefit.
Key person life insurance can help protect your business from tragedy. also include a rider for disability coverage to help if a key employee is disabled. A permanent insurance policy also pays a death benefit if the key person dies while;
Key Person Disability Insurance: Do Your Business Clients Need It
Most businesses run like a well-oiled machine. To operate smoothly, every piece of the machine has to work at maximum efficiency. So, what happens if an essential person in the business is suddenly unable to contribute? What if a top leader or sales professional becomes disabled and unable to work?
In cases like this, key person disability insurance can help.
How does key person disability insurance work?
Key person disability insurance covers one or more employees whose work is vital to the continued success of the company. When a covered worker experiences a qualifying illness or injury that prevents that individual from working, the policy pays the company a disability check.
Any business disruption can cost a company money, and this includes disruptions caused by a critical employee missing work. At the same time, recruiting, hiring, and training new workers is a costly enterprise, whether those workers are hired on as temporary replacements or permanent staff. A key person disability insurance check can help the company cover the financial loss associated with the lost work. It can also be used to pay the salary for a replacement worker.
Key person disability insurance is a type of short-term disability coverage. Most policies provide benefit periods that last between 12 and 24 months.
How is key person disability insurance different from regular disability insurance?
Does your clients business need key person disability insurance?
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Limitations Of Keyman Insurance
While this insurance can cover a range of scenarios, there are some situations where it isn’t applicable. For example, keyman insurance does not cover:
- A key person leaving your company to work for a competitor
- Nonemployees, including independent contractors
- Employees who are not critical to business revenue generation or operations
Also, an insurable interest has to exist for keyman insurance to be necessary and useful. If the loss of a particular person wouldn’t potentially cause financial harm to the business, then you may not be able to get a policy.
Who Sells Key Person Insurance
Key person insurance is available from many different insurance companies, and the best way to find the right carrier for you is through working with an independent insurance agent. They know which insurance companies to recommend to meet your needs, and can provide informed suggestions based on company reliability, rates, and more.
While many insurance companies could create a key person insurance policy for you, finding coverage could also depend on the area you live in.;Here are a few top picks for key person coverage.
- Best for disability coverage:;Guardian
- Best for customizable coverage:;Prudential Financial
One key person insurance company outshines its competitors:
- Best overall key person insurance company: ;Lincoln Financial
A Fortune 500 company, Lincoln Financial has been named the Best Life Insurance Company in the US several times by World Finance magazine. The carrier has an “A-” rating from A.M. Best and has been around in the insurance industry since 1905. Their key person insurance offers the following benefits, according to the carrier’s official website:
With such an extensive history and comprehensive key person coverage, it’s certainly worth a discussion with your independent insurance agent to find out of Lincoln Financial is the right carrier to meet your business’s needs.
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Cost Of Key Person Insurance
How much insurance a company needs;will depend on the;size and nature of the business and the key person’s role. It’s worth asking for quotes on $100,000, $250,000, $500,000, $750,000, and $1 million policies and comparing the costs of each.
In addition, the cost of the coverage will vary according to the insured person’s age and overall health, just like most other types of life insurance.
One major insurer, for example, would currently charge $107 a month for a $500,000, 20-year term policy on a healthy 50-year-old male. Raising the coverage to $1 million would bring the monthly cost to $190.
Examples Of Key Person Insurance In Action
It’s helpful to consider real examples of how key person insurance could operate in a business when shopping for your own policy. Check out some hypothetical scenarios and how key person insurance would work in each case.
- Scenario One: The key employee dies and the surviving business member has no idea how to run the business. They have to hire a CFO to take their deceased partner’s place, and use the life insurance proceeds to hire top talent.
- Scenario Two: The key employee gets disabled and the business owner has no customer skills. The business will suffer until the key salesman gets back on their feet. Disability insurance can help the business replace some of the lost sales income during this time.
- Scenario Three: The key employee and the business owner need a large business loan for new equipment. The bank requires life insurance on both of these workers to close the loan. Key person insurance can help cover this.
An independent insurance agent can provide even more examples of how key person insurance could benefit your company in real life.
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Using Your Key Person Policy
To receive benefits, the insured employee must meet the definition of total disability. In other words, he or she must be unable to perform the substantial and material duties of his or her specific occupation. The employee must also not be working in any other job with comparable duties and/or earnings for the business.
Key Considerations For Key Person Insurance
When deciding to purchase key person insurance, two key considerations are the amount of insurance desired, and the key persons commitment to the company.
Amount of Insurance to Purchase
The amount of insurance to purchase should reflect the dollar value financial impact from the loss of that individual. Insurance companies may provide a formula to calculate the dollar value.
Alternatively, a company can retain a financial advisorFinancial AdvisorA Financial Advisor is a finance professional who provides consulting and advice about an individuals or entitys finances. Financial advisors can help individuals and companies reach their financial goals sooner by providing their clients with strategies and ways to create more wealth to calculate the dollar value. When determining the amount of insurance to purchase, it is recommended to, at a baseline, consider the potential amount of lost profits and the cost to find and train a replacement.
The Key Persons Commitment to the Company
It is important to assess whether the key person is committed to the company. Key person insurance is more valuable if the key person stays with the company over the long term. In modern society, key person insurance has been decreasing in popularity due to the increasing frequency that executives and top talents are switching companies for a better work environment and/or compensation package.
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The Disability Insurance Underwriting Process
Your risk of becoming disabled plays a large role in determining how much you will pay for coverage. So how exactly do insurance companies calculate your risk of becoming disabled?
Individual disability income insurance requires underwriting. Whereas group plans help insurers spread their risk among a large group of policyholders, issuing an individual policy requires the insurance companies to assess the risk of a single applicant.
Before you get caught up in the cost, it helps to understand the various factors that insurance companies look at when assessing risk.
Hypothetical Examples Of Key Person Insurance At Work
Example 1: Protecting for Loss of Revenue
Peter owns a successful and rapidly growing small business. His top salesperson is James and he relies on him for the intellectual capital behind their proprietary technology company. Peter understood that James was a key person in his business so he took out life and trauma insurance on him. When James tragically died in a car crash, the business was deprived of his vital expertise and its ability to continue operating was in jeopardy. Luckily, Peter was able to use the payout from the key person policy to weather the loss and hire and train a new person to replace James, enabling him to continue operating the business.
Example 2: Protecting Business Debts
Colins business needs to buy expensive equipment in order to expand its operations. He takes out a business loan to purchase suitable equipment, backing the loan with a personal guarantee, a mortgage over the equipment, and his home. Colin takes out key person insurance on himself, realizing that if he were to get seriously ill or passed away, the company would have no means of repaying the loan. Two years after taking out the insurance, he suffers a serious illness that prevents him from working. The insurance pays out the loan, leaving the business and Colin debt-free.
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Key Man Insurance Vs Smb Life Insurance
You may be wondering, Whats the difference between key man insurance and small business life insurance?
Simply put, key man insurance deals primarily with death benefits, whereas small business insurance deals with a greater variety of risks.;
Small businesses deal with:
- Employees becoming disabled or unable to work due to other events;
- Relatives of deceased employees wanting to sell their stake in the company
Small business life insurance offers some potential solutions to these issues, such as:
- Executive benefits for top employees, including life insurance
- Key person insurance for disability
- The ability to liquidate business assets to protect personal assets
- A buy/sell agreement, where joint business partners purchase insurance on each other
Essentially, key person insurance is one form of small business life insurance. Its up to you to assess whether your company faces additional employee-related challenges.
If so, it may be worth considering a more comprehensive small business life insurance policy or multiple policies.;
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Life insurance by state.
Cost Of Key Man Life Insurance
The cost of key man life insurance will vary depending on the plan in question. The premium can go up or down depending on whether you purchase term life, whole life, or a variable plan.
Term life plans generally offer the best value, as they have lower premiums. First, determine the general range of how much youll need the plan to cover.
Then, its wise to ask for quotes for each plan amount, such as the premium for a key man insurance plan valued at $100,000 versus a plan valued at $250,000.
Finally, bear in mind that any premiums you pay on key person life insurance plans are not tax-deductible on federal income taxes, per the IRS.
THE SIMPLY INSURANCE WAY
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Executive Or Individual Disability Insurance
A personal disability policy is a smart solution to protecting your ability to earn an income. Disability income policies are commonly purchased by business owners, physicians, attorneys and other professionals to provide income in the event they become disabled and are unable to work. They are different than because they provide income, not a death benefit, and the income stream can be somewhat defined.
Executive disability policies declare a stated monthly benefit payable in the event of a disability and there is a waiting period that must be satisfied prior to benefits being paid. Once the waiting period has been satisfied, monthly benefits are paid to the individual as long as he or she is disabled subject to the benefit period set forth in the policy. With most policies, the benefit periods are 5 years or to age 65.
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Is Disability Insurance Worth It
As you weigh your options, consider what you would do if you couldnât work for an extended period.
- What if you endure a temporary or permanent disability at some point in your working life?
- How long could you go without a paycheck before experiencing financial hardship?
- Does your group plan provide enough coverage to maintain your current lifestyle?
- Could you get by on government disability benefits? If youâre actually approved, that is.
Of course, thereâs no way to answer any of these questions for certain. But you can prepare for the worst by putting a disability insurance plan in place today.
Better to be proactive now than reactive when it’s too late.
Jack Wolstenholm is the head of content at Breeze.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.
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Keyman Insurance And Buy And Sell Agreements
Buy and sell agreements specify how ownership interest in a business can be transferred from one person to another in the business. For example, say you own a business with a lifelong friend but anticipate wanting to retire before they do. You could draft a buy and sell agreement outlining what will happen to your share in the business once you’re ready to leave.;
A keyman insurance policy can be used within a buy and sell agreement to ensure that each co-owner is protected if something happens to the other. For example, the proceeds of a keyman policy could be used by your co-owner to buy out your share of the business if you pass away. This can allow the business to continue after you’re gone.
Protecting The Most Valuable
Ultimately, some people are more important to your business than others. If one of these people get sick or injured, they may no longer be able to work. You may experience unexpected and tiresome challenges. For instance, you may lose a skilled worker and that could lead to a disruption of your business. It may also cause your business to lose revenue.
If you lose the wrong person, some customers may be hesitant to work with your business. Furthermore, youll have to hire someone to replace this individual and that is going to cost a lot of money. You might be able to protect yourself from this problem by acquiring Key Person disability insurance. This insurance is designed to help Canadian businesses deal with the financial burden of losing a key contributor.
This policy will be owned and paid for by your business. If a key employee is injured or sick, the insurance will pay benefits to your company. Youll be able to use the benefits for numerous purposes including those below.
- To pay for a temporary replacement
- Prove that your company is financially stable to customers, shareholders, and creditors
- Minimize the costs associated with finding, recruiting, and training a new worker
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Elimination Period Or Waiting Period
The elimination period is the time that must be satisfied after a disability but before benefits become payable. A disabling injury or illness is a triggering event that starts the clock of the initial waiting period. The elimination period begins when the key employee is disabled, so if there is a disability, it is essential to notify the insurance company of a potential claim as soon as possible.
Depending upon the insurance company guidelines, the elimination period can be as short as 30 days or up to 365 or 765 days or even longer. The shorter the elimination period, the more you can expect to pay for the policy.
Typical elimination periods for key person replacement plans are 60 or 90 days. If a policy has a 90 day elimination period, in the event of a disability, monthly benefits become payable on day 91. Benefits are paid at the end of every month and continue as long as disability persists until the benefit period expires.