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Disability insurance to protect business owners



Disability insurance can help protect businesses through key employee disability insurance and disability buy-sell agreements.

Questions answered in this article:

  1. Who is considered a key person?
  2. What is Key Person Disability Insurance?
  3. What is Key Person Life Insurance?
  4. What is a disability agreement?

Most smart business owners will admit that their employees are the backbone of the company. They may even admit that there are specific employees who, without them, their business would suffer. It is these specific employees who can be considered key people.

Which employees are considered a key person?

Key people exist in all companies and are not defined solely by profession, salary or title. Key persons can be employees or employers. Their performance and value dictate the success or failure of companies.

Typically, we consider key people to be top salespeople who hold large accounts or managers who 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 adds significant value to a company and whose prolonged absence would cause significant losses to the company.

Examples of key persons are:

  • A well-known doctor or surgeon who attracts patients.
  • A hairdresser who is at the forefront of fashion.
  • A stock market expert who can seemingly predict the future.
  • An entertainer whose popularity attracts the crowds.
  • An architect whose unique designs are in high demand.
  • An Internet technician who single-handedly supports a company̵
    7;s corporate network.
  • A chef whose menu creates a line around the block.
  • A dentist whose charisma makes her clients smile.

The loss of a key person can be devastating, affecting not only the company’s profitability, but also productivity, customer relations, employee morale and overall company efficiency.

What is Key Person Disability Insurance?

Disability insurance for key employees provides financial protection for the company if a key employee was unable to work due to a disability. Key Person Coverage provides cash flow to help businesses 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 for a recruiter to find a replacement,
  • to compensate losses due to reduced productivity,
  • to provide travel expenses for a new account manager to meet with clients, and
  • to supplement the overtime pay of the existing staff to cover the extra workload.

Unlike personal individual health insurance, the business buys disability insurance for key personnel. The company pays the premiums and is the beneficiary. If the key person becomes disabled and cannot work, the business receives benefits.

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

Key Person Disability Insurance Features

Elimination period

The elimination period is the time that must pass after the date of injury or illness before the company receives compensation. 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 sums, and are generally received free of income tax. The compensation period is the number of months that compensation is paid during a period of invalidity. Compensation periods can vary from six months to age 65.

Presumptive disability

If the covered worker 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 compensation is paid out during the entire compensation period or as long as the loss persists.

Recurrent impairments

If, after a period of total disability, the employee returns to work full-time and within six months is disabled again, the policyholder has two options: continue the previous claim without needing a new elimination period or elect to have a new elimination/benefit period. Once a period of six months has passed after returning to work, each new claim will be given a new elimination and compensation period.

For more information on health insurance, check out our individual disability insurance page.


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