Key Man Disability Insurance: Keep Your Company Afloat in Troubled Times

Key man disability insurance protects your business in case of illness, injury or an accident leaves you or one of your key employees unable to work.

Key Man Disability Insurance: Keep Your Company Afloat in Troubled Times

You get peace of mind knowing your business can continue to operate in the event of a mishap.

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A company will buy an insurance policy on one or more of the major people in the company. The insured are the "key" people the company depends on to survive, like a top salesperson, an executive, or the owner. The company pays the premiums and becomes the beneficiary.

You can insure a person against death with Key Man life insurance, or disability.

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In the event of disability, the benefits are paid according to the terms outlined in the policy. The company can use the funds any way it sees fit. In most cases, the cash is used to keep the company afloat until a suitable replacement can be found.

One IT company had two employees, programmers, out of 150 employees, who worked on a specific program for a very large customer. The program was sophisticated, with millions of lines of code, and it would take another employee at least 3-6 months to be knowledgeable and proficient with this program.

This IT company needed key man life and disability insurance for these two employees, in the event that something happened to them.

Questions About Key Man Insurance For Disability

When considering key man disability insurance, a business owner should ask some important questions:

  • What are the consequences for the business if a key man is disabled and unable to perform his duties?
  • How long will it take to find and train a replacement?
  • What will it cost to find and secure the services of a new employee?
  • How much of the company's revenue is the key person responsible for?
  • Will clients be lost if a key person becomes disabled?
  • Can the company self-insure?

Options of a Key Man Disability Policy

Key man disability insurance is not readily available from traditional disability insurance providers. Unlike policies for an individual, key man policies have limited features and options. These policies are usually custom-designed, within certain guidelines, to meet the specialized needs of a company.

Unlike individual disability coverage, which is designed to support the disabled person for the rest of his life, a key man policy is generally very short-term. It is expected that the company will find a suitable replacement within a year or two. A claim is usually paid as monthly benefits, or as a lump sum payout.

With the monthly payments option, the policy usually states that after the elimination period, which is about 30 to 90 days, benefits are paid once a month at the predetermined amount for the life of the policy. Key man disability insurance policies generally pay out for six to 24 months, depending on the needs of the company.

The elimination period is longer with a lump sum payout. It generally takes 365 days before benefits are paid. During this time, if the insured person is unable to perform his regular duties, the lump sum payment is made to the company and the policy is terminated.

The value of the payout, either as monthly payments or one lump sum, is determined by several factors. The income of the insured, the cost of finding and hiring a suitable replacement, and the value of the contribution the key person made to the company are all taken into account.

When applying for key man disability insurance, financial documentation proving the value of the employee, and the need for disability coverage, is required for each case.

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Why Insure Against Disability?

Losing a key person leaves a business feeling lost, and more than a little displaced. Finding a suitable replacement can be daunting.

In a small company, all of the responsibility of keeping the books, handling the employees, managing customers and much more, are handled by the owner or founder of the company. Without him, the company is likely to fall apart.

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There is no easy way to determine the value of a key man. Typically, an insurance agent and the policy buyer will come up with an adequate figure together.

The estimated loss of profits, the costs of finding a replacement and a compensation-multiple formula are the methods typically used to calculate the financial impact the loss of a key player would have on the company.

Planning ahead and training a temporary back up can help a company run more smoothly, until a permanent replacement can be found.

As with any other type of purchase, you should shop around for key man disability insurance to ensure the policy meets you needs. Disability insurance is usually term, not whole life.

How to Purchase Key Man Disability Insurance For Your Company

If you are just starting out and developing your business, you probably haven't had time to think about key man insurance.

Key man disability insurance will help your company survive a serious mishap

You will soon realize that key man insurance is an essential component in keeping your business safe.

The loss of a key player can mean the loss of the company. Some alternatives to key man insurance include:

  • Using the personal funds of the owner. Most business owners reinvest profits back into the business. They do not usually have large amounts of money available.
  • Cover the cost from the company's cash flow. This is known as self-insuring, and is basically the same as not planning at all. If the owner or a key person dies or becomes disabled, the cash flow is the first thing that suffers, since this is the person bringing in the business. There may not be any cash flow to cover the cost of operations, never mind find, hire and train a suitable replacement.
  • Borrow the funds required. The business might be able to borrow the money needed to keep operations going until a replacement is found. But, since the key person was the major money maker in the company, securing a loan might not be easy. Plus the interest charges might become quite a burden after a while. Especially if it takes a long time to find a suitable replacement and get the cash flowing again.
  • Set up a sinking fund. A sinking fund is designed to accumulate funds over time, in the hope that the fund will be large enough in case of disability or death. However, if the key person becomes disabled or dies before the fund is large enough, the company can face serious financial problems.

Key Man Disability and Life Insurance is The Better Solution

Buying key man disability insurance is by far the most economical and easiest way to protect your company from financial disaster in the event of the death or disability of the key player.

Insurance benefits provide the cash needed to recruit, hire and train a suitable replacement, as well as to cover immediate operating costs until the replacement is ready.

Key man disability insurance is the smart, economical way to protect your business.

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