Key Person Insurance

Key Person

Business Overhead

Loan Indemnification

Buyout 

Losing a key person due to health problems can devastate a business, threatening the livelihood of the other Principals, employees and stakeholders.  

Key Person insurance reduces this risk by providing a benefit to the business - either as a lump sum or monthly - to meet financial commitments.

Partnership Risk

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 is disabled due to accident or illness or dies.  Disability is defined by whether they can perform their key person occupation specifically, not just any occupation.  

 

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.  Life insurance always pays a lump sum.

Key Person disability insurance is only valid while the Key person is employed at the business purchasing coverage. 

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.  If the income continuation payments are terminated by the healthy owners, the disabled owner will have to rely on other sources of income and probably negotiate their exit for less than fair market value.

Disability insurance solves these problems by transferring the cost of income continuation and providing a secure source of income for the disabled owner.

Professional practices running solo or with just a couple of producing practitioners run the risk of losing not only the business, but clients, employees, credit standing and goodwill if he or she cannot pay fixed business expenses during a period of disability.

 

Without BOE, when the business owner eventually recovers he or she may have nothing to come back to, and may find it impossible to rebuild.  With BOE, these problems are relatively minor.  If it looks like a return to work isn't going to happen, BOE buys time to negotiate the sale of the practice for fair value and plan an orderly transition.

BOE premiums are tax deductible and very affordable.  BOE policies cover most expenses, including rent and lease payments, employee salaries, a professional interim replacement, malpractice insurance, supplies and more. 

Disability Buyout / Buy-Sell

Large equity positions can make it difficult to cash out a Principal in the event of disability due to the sheer size of the transaction. 

For the same reason life insurance is used to fund buy-sell agreements, so is disability insurance.  A long, drawn-out process is not in anyone's best interests as delays only introduce unnecessary economic risk, legal risk, and complexity.  Disability is 2-3 times more probable than premature death, so it doesn't make sense to have one without the other.

Specialized disability insurance products designed for business buy-sell funding have several features that ordinary disability income and group LTD plans lack.   Crucially, they involve an lump sum payout up front, similar to life insurance, rather than monthly benefits.   Lump sums get the transaction over with quickly, and avoids the mess that could be created if the disabled business owner is able to return to work after the buy-sell has been triggered.  Buy-sell disability products are specifically designed to complete the buy-out even if recovery occurs, in accordance with a legally binding buy-out agreement.

 

Get Started with Key Person Insurance

Disability Underwriters

1420 5th Avenue   Suite 2200

Seattle, WA     98101

(206) 673 2219