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Disability Insurance - Keyperson Insurance

Key Person disability InsuranceThe Keyperson Plan is a comprehensive disability policy that will provide benefits in the event of a key employee’s Total Disability.

There are two types of Keyperson Plans; the Wage Loss Plan and the Reimbursement Plan.

KEYPERSON COVERAGE – WAGE LOSS PLAN

This plan is designed to provide a source of income for a key employee while he/she is Totally Disabled. The premiums are deductible to the employer but are considered a taxable benefit to the key employee. The disability benefit is tax free to the key employee. Regular underwriting applies.

KEYPERSON COVERAGE – REIMBURSEMENT PLAN

This plan is designed to protect the company from lost sales, increased expenses or high replacement costs when a key employee is Totally Disabled. Doubling up of the coverage on the key employee’s life with regular, individually owned disability coverage is allowed. The premium is not deductible and the disability benefit is tax free to the company. The policy must be company owned and cannot be assigned.

This coverage is not available to anyone having more than 10% ownership in the business. The following details apply to both the Wage Loss Plan and the Reimbursement Plan.

Key Person Disability Insurance Case Example

Several years ago, Arthur Burns developed an excellent software program for small business use. Although he knew he had a great product, he also knew he was not a professional salesperson – he was a “computer guy”. So he hired Marie to be the salesperson of the company. Marie brought to the company a rare combination – an aptitude for accounting and a flare for sales. Over time, Marie developed a deep understanding of the workings of software, and was very successful at both selling it and in training her customers how to use it. Based on Marie’s feedback, Arthur improved the program and developed several other saleable software products. Marie’s expertise even allowed her to spot opportunities for customized programs. On Marie’s referral, such customers would pay Arthur “big bucks” to customize their programs for specific needs.

In many ways, Marie has made an extraordinary contribution to Arthur’s success over the years. Her knowledge of the products and keen sales sense has positioned her as a “difficult to replace” asset of the company. Marie is compensated very well and her income is protected by a personal disability insurance policy. Although Marie would be financially stable personally during a disability, Arthur would be in trouble. Not only would it take considerable time and resources to find and train a replacement for Marie, but the lost revenue to the company would be a severe financial setback.

Key person disability insurance on Marie is what Arthur needs. Key person disability insurance serves the same fundamental need as key person life insurance. Key person insurance is designed to replace the lost profits that a business would incur, due to the loss of a key employee.

The disability insurance industry has created three business products, designed to protect three distinctly different business problems that a disability could create. They are: overhead expense disability insurance, key person disability insurance and disability buy/sell insurance.

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