What is a key person's disability insurance?
Key person's disability insurance provides the company with financial protection if a key person could not 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 staff member becomes disabled.
The most common uses for key disability benefits are:
- to cover the costs of a recruiter finding a replacement,
- to compensate for losses due to reduced productivity,
- to provide travel expenses for a new account manager to meet customers and
- to supplement overtime pay for existing staff to cover the extra workload.  Unlike a personal individual disability insurance, the company buys a key person's disability insurance. The company pays the premiums and is the beneficiary. If the key person becomes disabled and cannot work, the company receives benefits.
The cost of a key person's disability insurance is based on the employee's age, gender, occupation, tobacco status and state of residence. [1
The elimination period is the time that must elapse after the date of injury or illness, before the company receives benefits. There are different elimination periods. The most common are 30, 60, 90 or 180 days.
Benefits can be paid as a lump sum or a combination of monthly and lump sums and are generally tax-free. The benefit period is the number of months in which benefits are to be paid during a period of invalidity. The compensation periods can range from six months to 65 years.
If the insured employee loses the use of both hands, or both feet, or a hand and a foot, or the sight of both eyes or hearing in 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 will be paid for the entire benefit period or as long as the loss exists.
If the employee returns to full-time work after a period of total disability and is disabled again within six months, the policyholder has two options: continue the previous claim without needing a new elimination period or choose to have a new one elimination / benefit period. When a period of six months has elapsed after returning to work, each new claim will have a new elimination and benefit period.
For more information on disability insurance, check out our page for individual disability insurance.
Key person's life insurance
Key person's disability insurance is often linked to key person's life insurance. Just as the disability policy would pay a company if a key person became disabled, the key person's life insurance would pay the business if the key person died.
How the key person's life insurance works:
- The company receives the employee's written consent.
- The business follows the formalities required to approve the purchase of the key personnel policy. (For example, if the company is a company, the board must approve the purchase.)
- The company applies for, owns and is the recipient of insurance on the lives of key personnel.
- The company pays all premiums and meets all requirements for reporting and record keeping.
- If the employee dies, the company receives the policy at the employee's death to use it when needed to cover losses and find and train a replacement.
»Read more: Using Key Person's Life Insurance to Secure Your Business
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