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, which is synonymous with key man insurance, compensates the business for financial losses due to the death or disability of an important member of the business.

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 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.

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 Business Overhead insurance, when the business owner eventually recovers he or she may have nothing to come back to, and may find it impossible to rebuild.  With it, these problems are relatively minor.  If it looks like a return to work isn't going to happen, overhead insurance buys time to negotiate the sale of the practice for fair value and plan an orderly transition.

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

Loan indemnification insurance is an optional feature of overhead insurance which can be standalone or part of a larger overhead policy.  One of it's unique features is the ability to pay a third party loss payee, such as a bank, that may depend on Loan Indemnification insurance in order to protect itself from default due to the key person becoming too sick to work. 

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 a Proposal

 

Benefits and premiums depend on individual risk factors, such as occupation, earnings stability and sometimes health.  

 
 
 

Disability Underwriters

1420 5th Avenue   Suite 2200

Seattle, WA     98101

(206) 673 2219