A firm established by two 35-year old co-owners faces a 75% probability that at least one owner will sustain a long term disability prior to age 65.
Allan B. Checkoway; Insuring the Disability Hazard in the Small Closely Held Corporation; Journal of the American Society of CLU & ChFC; January 1985, based on 1964 Commissioner's Disability Table
Key Person Insurance
Key Person insurance provides a benefit to the business if a Key Person cannot perform their specific role for medical reasons. Key Person insurance can be taken out on someone that is not a business owner.
Key Person disability insurance normally pays a monthly benefit for one (1) year followed by a lump-sum benefit. For example, the benefit may be $20,000 per month for one year, followed by a $500,000 lump sum.
Key Person life insurance always pays a lump sum.
Income Continuation of Principals
Multiple Principals often have a close relationship and will probably want to provide some income continuity for a co-owner during a period of absence. But a conflict is sure to occur if this continues for very long, as no business can continue to pay a nonproductive owner indefinitely. As the termination of payments draws near, the disabled owner may have to sell his/her position for less than fair market value.
Disability insurance solves these problems by transferring the cost of income continuation to an insurer, allowing the disabled owner to exit on more favorable terms.