Key Person Disability Insurance

Many businesses rely heavily on a small number of individuals to generate revenue, maintain client relationships, or manage operations. While life insurance is commonly used to address the risk of death, the financial impact of a disability is often more likely and can be just as disruptive.

Key Person Disability Insurance is designed to protect the business if a key employee, partner, or owner becomes unable to work due to illness or injury. It provides financial support to help the business remain stable during a period of disruption while decisions are made and responsibilities are adjusted.

Key Person Disability Insurance provides benefits to the business when a designated individual becomes disabled and cannot perform their role. The policy is owned by the business, and benefits are paid directly to the company.

The coverage is not intended to replace the individual’s personal income. Its purpose is to help the business manage the financial impact of a prolonged absence and maintain continuity during recovery or transition.

A key person is anyone whose absence would materially affect the business. This often includes:

• Founders or principal owners
• Senior executives or partners
• Revenue-generating professionals
• Individuals with specialized expertise or client relationships

If losing someone temporarily would create financial, operational, or strategic strain, they may be considered a key person.

Benefit payments can be used flexibly, depending on the needs of the business, including:

• Offsetting lost revenue or productivity
• Hiring temporary or permanent replacements
• Covering recruitment or training costs
• Preserving business value while roles are restructured

The goal is stability, not profit.

These cover different risks and are often used together.

Business Overhead Expense (BOE) Insurance

• Covers fixed operating expenses
• Focuses on keeping the business open
• Typically applies when the owner is disabled

Key Person Disability Insurance

• Protects against the loss of a specific individual
• Addresses disruption beyond fixed expenses
• Applies to key employees

Each serves a different role in business disability planning.

Key person disability insurance addresses the risk of a prolonged absence due to illness or injury. Key person life insurance, on the other hand, provides a lump sum benefit if the individual dies.

Many businesses use both to ensure protection regardless of whether the risk is temporary or permanent. Disability events are more common, while life insurance addresses final and irreversible loss. Coordinating both forms of coverage helps ensure continuity under different scenarios.

Premiums are generally not deductible, and benefits may be tax-free when received by the business.

This type of coverage is often appropriate when:

• The business relies heavily on a small number of individuals
• Revenue would decline materially if a key person were absent
• Specialized expertise or relationships are difficult to replace
• There is limited redundancy within the organization

It is especially relevant for professional corporations, owner-managed businesses, and growing firms where responsibilities are concentrated.

Key Person Disability Insurance is an important but often overlooked part of business risk management. When a key individual is unable to work, the financial impact can extend well beyond their personal income.

As with all disability planning, the objective is not to over-insure, but to identify real exposure and structure coverage that reflects how the business actually operates.

If you would like to review whether key person disability insurance is appropriate for your situation, we are happy to discuss your structure, risks, and available options.