What is the difference between disability insurance and key man disability insurance?

By Michael Gray

MEG Financial


Disability insurance is a foundational risk management strategy that both individuals and businesses often overlook. It is well known and widely accepted by most people that the risk of disability for most of us is significantly greater than death. While both individual disability and key person disability are vitally important, they are not designed to cover the same types of need, and as a business owner, you need to know the policy differences.

Characteristics of individual disability insurance:

The goal of individual disability insurance is to protect your ability to earn an income. Policies are usually long term contracts to age 65 or 67.

Benefits are calculated based on a percentage of income which varies based on occupation but not more than 60 percent - 70 percent. Benefits are paid directly to you and are generally tax free (as long as premiums are paid by you and are not deducted).

Rates are based on your specific occupation and job duties. There are 6-8 insurance companies that offer quality long term disability policies. Physicians, attorneys, CPAs and other professionals have long seen the value of protecting their ability to earn an income.

Characteristics of key man disability insurance:

The goal of key man disability insurance is protect the company from the loss of a key employee or executive do to a disability. Benefits are payable to the company, are usually tax free and can be used for any purpose.

Key person disability insurance policies are short term contracts usually only providing benefits for 6-24 months. They are designed to buy time by providing cash to the company until the key employee recovers or a capable replacement can be found.

Key man DI policies also have a waiting period after a disability and before benefits are payable — usually 30-90 days. Key man DI policies can be customized to fit the needs of your business. Benefits can be flexible and are not specifically based on the income of the key employee. Rates are competitive given the alternative of self-funding the loss of a key person.

There are limited opportunities to buy key person disability insurance with only two carriers offering contracts.

Summary

If you are a business owner, your business likely is dependent upon a key person or key employee. If your company is very small, and you are that key person, individual disability insurance maybe the best way to protect your business and family. If your company depends on others that are major contributors, key man disability insurance should be considered.