Key man disability insurance, or key person insurance as it’s now known, is an investment that can act to safeguard the future of a business for years to come. Key person insurance presents a number of potential benefits for both small and large businesses alike. In this blog post, we’ll tackle seven common questions about key person disability insurance, and offer the information business leaders need on this topic. Check it out here:
What is Key Person Disability Insurance?
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 the beneficiary and the policyholder. So the business itself pays for the premiums and in return gets access to any insurance proceeds that are paid out.
How Does Disability Insurance Work?
In a basic sense, key person disability insurance works just like a “regular” disability insurance policy. If a key member of a business were to suffer an illness or an accident and become unable to work for an extended period of time, the policy would take effect and the beneficiary (the business) would receive compensation as a result. Though short and long-term disability policies may vary slightly from business to business, some policies may cover absences ranging from a few weeks to permanent absence.
Who is a Key Person?
Technically speaking, business leaders may designate anyone at their company as a “key person” for insurance purposes. In practical terms, though, key personnel are professionals who have highly specialized knowledge, skills, and/or contacts. Often, businesses designate professionals like CEOs, executives, and top sales managers as key personnel, as well as the business owners themselves.
Can You Take Out Multiple Key Person Insurance Policies?
Yes, businesses may take out more than one key person insurance policy at a time.
What are the Benefits of Key Person Insurance?
Key person disability insurance provides businesses with a “safety blanket” should a vital employee become disabled. Key person insurance covers a number of costs and expenses associated with the absence of key personnel. Insurance proceeds from a key person disability insurance policy may include compensation for all of the following:
- Cost of recruiting, training, and hiring replacement employees.
- Cost of hiring temporary staff.
- Loss of revenue and/or costs from loss in operational efficiency.
- Overhead costs of the business.
- Cost of monthly obligations on business loans.
- Contractual obligations
- Buying out shares of a disabled owner.
How Much Does Key Person Insurance Policy Cost?
No two key person life and disability insurance policies will cost the same. Insurance companies determine the cost of premium payments based on a myriad of factors, including but not limited to:
- The key person’s age.
- Their lifestyle choices.
- Their health record.
- Their salary.
- Their contributions to a business’s revenue and income.
- The amount of coverage the business pursues.
For a life insurance estimate, you can check out our key person insurance calculator here to see how much key person insurance coverage you may need and what it may cost your business. We’re developing a disability calculator as you read this article and will update this post soon with that link.
Is Key Person Insurance Tax Deductible?
In most instances, no, key person insurance premium payments are not tax deductible. (There are a few notable exceptions to this general rule such as business overhead expense insurance or BOE for short) However, on the plus side, any benefits paid out as a result of the policy are income-tax free –– which is a serious advantage for businesses.
Still looking for more information on key person insurance? Then contact the pros at Helm Financial today. Our team has extensive knowledge of key person insurance, and we’ll work with you to develop a robust business continuity plan to protect your interests moving forward.
This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations.