Maybe it’s the top sales person, bringing in more revenue than everyone else. Or the office manager who takes care of the day-to-day tasks—tasks that everyone else doesn’t even realize need to be done. Or it’s the programmer who provides the skills needed for technology to be an asset instead of a headache. It could be all three.
Think about your business owner clients. What would they do if they lost an irreplaceable person? Would they have to close the doors? Or sell the business?
In our industry, we’re committed to planning for the future. We protect individuals, families, and businesses from life’s “what ifs.” We help them prepare financially. And we help them avoid risk whenever we can.
When working with your business owner clients, don’t overlook the need for key person disability insurance.
There’s a good chance that you’ve talked to your business owner clients about purchasing life insurance on key employees. If that’s the case, they’ve already identified those essential people who drive the success of the company. If not, that’s the first step. Talk to your business owner clients and figure out who they consider to be key employees.
Once identified, discuss what the employer would do without them. Although we often look at life insurance first, there’s a higher chance that the person will become disabled, not die. Fortunately, we can protect against that.
How Key Person Disability Insurance Works
Key person disability insurance (DI) helps a business owner replace lost revenue when an essential employee becomes injured or disabled. There are lots of options out there—and lots of ways to customize coverage to fit specific needs.
Most key person DI policies work the same, with the benefit:
- Paid directly to the company on an indemnity basis, with no restrictions on how the benefit is used
- Received tax-free to the business (but the premiums are non-deductible)
- Topping out at three times the key employee’s income, or less, depending on how the policy is designed and the carrier options
- Paid monthly, as a lump sum or as a combination of the two
- Paid for a benefit period of up to 24 months
Let’s think about that in practical terms. You have a business owner whose key employee is out on a disability, and they aren’t sure how long the illness will last. After personal concern for the employee, cash flow is most likely the next big consideration. With a key person DI policy in place, it’s a huge relief to know that the business will have cash benefits to spend on hiring a temp or outsourcing certain responsibilities. It means they can stay afloat while still being supportive of the employee. In many cases, it’s the difference between barely surviving and being able to continue to move ahead.
Designing a Policy
We mentioned that there are many ways to design a policy, and we weren’t kidding. But there are some general guidelines to use when figuring out the right level of coverage. Specifically, you should consider:
- Elimination period: How long does the business want to wait before benefits kick in? This is measured in a number of days generally ranging from 90 to 730 days depending on the payout option. The shorter the elimination period, the higher the premium.
- Aggregate benefit: This is a derivative of the employee’s salary. The benefit is usually three times the person’s income for the length of the policy.
- Benefit payout: A combination benefit can be the best of both worlds. A monthly benefit supplemented by a lump sum payable later can be a great solution if the disability lasts longer than expected. Of course, monthly only or lump sum only are also payout options.
Start Your Discussion
Although nothing can replace an employee that’s, well, irreplaceable, key person DI can offer financial protection. In addition to providing funds for a temporary replacement or to offset the cost of recruiting new talent, a key person DI policy can assure clients and partners that the business is financially stable. And it’s a great employee retention strategy.
Don’t limit your discussion of key person coverage to life insurance. The need for DI protection is just as important—and just as achievable.
Written by Tim Kukieza, VP Disability Income, Ash Brokerage