In many cases, the most valuable asset a business has is one or more “key employees”. While the employee may be covered by individual disability insurance and even worker’s compensation, if they were to suffer a disabling illness or injury, the business itself stands to lose significant earnings through that loss. Key-man disability insurance is designed to insure against this potential loss, for the sake of the business.
Small businesses may rely heavily on a sole individual, without whom the business would quickly fail. However, even medium and large sized businesses rely much more on some individuals than on others. Losing these key employees can mean a huge potential loss in revenue or, worse still, it could mean the end of the business completely.
Key man disability insurance is not a legal requirement of a business, but it is a sensible addition in many cases. Because fewer businesses and organizations consider key man disability insurance, there are significantly fewer options available to those that do. In a large number of instances, businesses would need to specifically request a policy that is individually tailored to their needs. It is also usual to have separate policies with very different features for each key member of a company.
Any company looking to take out a key man disability insurance policy needs to consider all of the financial impacts and cost implications of losing that employee. Consider the direct revenue that individual brings in to the company and how much it would cost to find and train a suitable replacement. Hiring a new recruit can be a lengthy process for some positions, and they will almost certainly require some time to become proficient in the new position. All of these factors need to be considered when determining the financial value of a key member of staff, partner, stakeholder, or any other individual.
Companies usually have two options regarding a financial payout; monthly repayments or a single lump sum payment. Monthly repayments usually continue for a period of between 6 months and 2 years because it is assumed that a candidate can be found and adequately trained within that period. Lump sumps are calculated using this same period but the entire settlement is made upon the disability to that key member of staff.
Once a payment has been made, it is at the discretion of the company as to how the money is spent. There are usually no stipulations on whether it should be used to train an existing staff member or start a hunt to find a new one.