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Based on their size, small businesses rely on a few essential staff and owners to operate effectively and efficiently. Whether it is a front-line supervisor that runs the crews or organizes the work, a sales manager that creates and maintains customer relationships, or the owner of the company, the absence of a key person could place the success, or even survival, of a business in danger.
Key Person Insurance is a risk management tool that addresses the loss of a valued contributor due to death or disability.
What you need to know
The beneficiary of Key Person Insurance is the employer. Unlike most employee linked insurance the beneficiary is not the staff member, their family or their estate.
For the “life” portion of Key Person Insurance, either term or permanent life insurance can be utilized. The coverage period for term insurance is usually selected to match the employee’s retirement age, while permanent insurance could cover their entire lifetime.
The coverage amount is tailored to a company’s needs and the value of the employee’s contributions to the company. The proceeds can be received tax-free. The funds can be used at the company’s discretion to recruit and hire a replacement, pay bills, and protect the company’s financial health by paying financial obligations that might be difficult to meet after the loss of an important team member.
Key Person Disability Insurance addresses the loss of vital staff member temporarily. Typically, the disability portion insures against loss of an adult employee below 55 years of age benefits beginning 60 or 90 days after total disability. Total disability occurs when the employee is unable to perform the important elements and duties of their occupation.
The amount of disability benefits is chosen to cover the temporary cost of a replacement for the disabled employee. Since a key person is skilled and valuable, and not easily replaced benefits can be $2,500 per week or more.
With disability benefits established to assist the business in the short-term, the benefits are short-term, too, typically limited to one year of coverage.
Wage-loss disability insurance benefiting an employee usually runs until retirement age, but that is not the case for Key Person Disability Insurance. A policy that names an employer as the recipient of benefits should be implemented with a comprehensive insurance plan that also benefits the employee or the employee’s heirs.
The Bottom Line
There can be unique features of this type of insurance; future insurability, waiver of premium and return-of-premium riders to complicate matters. We recommend that an Advisor with specialized experience in Key Person Insurance be engaged.
