Key Person Insurance

This insurance provides a financial payout to the business if a key employee, crucial to the functioning of the business, becomes disabled. The payout helps the company manage the financial strain of losing a key employee, such as covering lost profits or funding the recruitment and training of a replacement.

There are three main types: Key Person Disability Insurance, which covers losses from the disability of a vital employee; Buy-Sell Disability Insurance, which facilitates the transfer of ownership if a business owner becomes disabled; and Business Overhead Disability Insurance, which covers ongoing business expenses during the disability of an owner or key employee.

In the context of Key Person Disability Insurance, "total disability" is defined as a condition where, due to injury or sickness, the insured individual is under consistent and direct care of a physician and is rendered incapable of performing the essential duties of their regular occupation. This definition emphasizes the inability to carry out occupation-specific responsibilities as a result of the health condition.

The coverage period for Key Person Disability Insurance is determined by several factors outlined in the policy contract. It remains effective until one of the following occurs:

• the insured person reaches the age limit specified in the contract;
• the insured ceases active full-time employment for reasons other than total disability;
• the maximum benefit period for a single period of total disability is reached; or
• benefits are triggered under a unique policy provision (e.g. replacement expense benefit provision if you must replace a key person who is disabled)

Each of these conditions is clearly defined in the policy terms.

The coverage period for Key Person Life Insurance varies based on the chosen policy type. Term life insurance typically offers coverage for fixed periods, such as 10 or 20 years, suitable for short to medium-term needs. On the other hand, permanent policies like universal life insurance can provide lifelong coverage, ensuring protection throughout the key person's lifetime, aligning with long-term business strategies.

Key Person Insurance is vital as it safeguards a business against the financial impact of losing a key individual due to death or total disability. It provides essential working capital to maintain operations, and covers costs associated with recruiting and training a replacement. In scenarios where the key person is the primary contributor, this insurance can be a financial lifeline, compensating the business or its owners for lost income if the business struggles to continue operating or faces closure.

A 'Key Person' is typically someone whose skills, knowledge, reputation, or network are crucial to a company's financial success. This can include executives, department heads, top salespeople, or anyone whose absence would significantly impact the company's revenue or operations.