Key Person Insurance
Keep the business running in the event of a key person's death or disability.
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Key Person Insurance
Meaning and Purpose
Key person insurance provides businesses with a source of funds upon the death or disability of a key member to offset losses attributable to the key person's production, specialized knowledge, legal privilege, or relationships. Business owners are often insured with a related type of policy to fund the buy-out of other partners or cover their portion of the overhead.
Exactly how the business intends to use the funds affects up-front benefits, whether premiums can qualify as an ordinary business expense, and ease of insurability.
Key Person Insurance Products
(Life & Disability)
Advantages of Key Person Insurance
Keep the Business Going
Life and disability insurance policies provide an easy way to provide funds should anything happen to your key employee. You may needs funds to:
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Pay headhunter fees and a replacement's signing bonus
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Buy out a partner's business equity
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Cover business overhead
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Entice a key employee to who is underperforming due to a medical problem to voluntarily leave or go on claim so that they won't litigate for wrongful termination.
Access to Credit
Small Business Administration loans require life insurance for a reason, and the same reasoning applies to disability. More so, in fact, because long term disability is at least three times more likely than death.
Both Life and Disability are Important
According to Milliman, an actuarial consultancy, the career risk of disability for longer than 90 days is 30%. However the perceived risk is only 2%, according to the Council for Disability Awareness, which is a gross underestimation.
The Role of Key Person Insurance in Retention
Key person insurance programs can, optionally, be coupled with "golden handcuffs" or contingent deferred compensation plans. This is an advanced feature and is generally discussed only after defining the exposure to a key person's death or disability due to it's capital-intensive nature.
The Difference Between Long Term Disability Insurance and Key Person Insurance
Long Term Disability (LTD) insurance is for personal income protection, whereas Key Person insurance is for business protection. Although the phrase "key-person insurance" loosely refers to any insurance benefit for the purpose of business continuity, there are actually specific policy types for the purpose of funding business overhead expenses and another type for business buy-outs. It is not really possible to re-purpose LTD for business protection due to regulatory obstacles, and for buy-out purposes there is a special requirement that funding must continue if recovery occurs after the buyout clause is triggered, which LTD can't do.