11.4.4 Key Person Disability Insurance
As you studied in Lesson 10 regarding life insurance, key person insurance is designed to help protect a business against financial loss that may be caused by the death of a key, or economically valuable, person. Key person disability insurance is designed for the same purpose.
Complete control of the policy is given to the company as an owned asset. The business actually owns the policy, pays the premiums and is the beneficiary. Premium payments are not tax deductible; therefore benefits are tax free.
The key person's economic value to the business is determined in terms of the potential loss of business income that could occur, as well as the expense of hiring and training a replacement. The key person's value then becomes the disability benefit that will be paid to the business. The benefit amount may be paid in a lump sum or in monthly installments. Generally, the policy's elimination period will be 30 to 90 days, and the benefit period will be one or two years.
