Key Person Disability Insurance

Key man disability plan options

Not all traditional disability income insurance companies offer key man disability income insurance. Often key man disability policies are custom designed to meet the specific needs of a small business. Typically, these policies provide a very short benefit period, assuming that a capable replacement for the disabled employee can be found within 12 to 24 months.

In the event of a claim, either a level monthly benefit or an annual lump sum benefit are the usual payment options.

Monthly benefit payout: The monthly benefit payout option states that, after the initial elimination (waiting) period, benefits are payable at a set monthly amount for the life of the policy, usually between 6 and 24 months. Both the length of the elimination period (typically between 30 and 90 days) and the length of the benefit period are determined at the time of application for the insurance policy.

Lump sum benefit payout: This is different than a traditional individual disability income insurance policy. The lump sum benefit approach mandates a longer elimination period than a traditional individual disability insurance policy and is, in fact, a critical part of the policy. The typical lump sum elimination period is 365 days before benefits are paid. At that time, if the key employee still cannot perform the regular and substantial duties, the lump sum benefit is paid to the company and the policy terminates.

In either case, the amount of the benefit is determined by a number of factors, including the income of the key employee, the cost associated with replacing that employee and the employee’s contribution to the company’s earnings.