Key Person Disability Insurance

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on July 04, 2023

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What Is Key Person Disability Insurance?

Key person disability insurance is a critical form of coverage that can safeguard a company's financial stability and overall well-being in the event of an essential employee's disability.

This insurance can provide financial protection to businesses by compensating for the loss of key employees who contribute significantly to the company's success.

Key Person Disability Insurance Features


Key person disability insurance provides financial protection for businesses when a key employee becomes temporarily or permanently disabled. This type of coverage is designed to help companies offset the loss of revenue and additional expenses that may arise due to the key person's absence.


Income Replacement

One of the primary benefits of key person disability insurance is income replacement. The policy provides funds to help the company compensate for lost revenue and maintain business operations during the key person's absence.

Business Continuity

The insurance ensures business continuity by providing the necessary financial support to keep the company running smoothly. The funds can be used to hire and train a temporary or permanent replacement, helping the business maintain its operations and reputation.

Hiring and Training Replacements

Key person disability insurance can also cover the costs associated with hiring and training a new employee to fill the key person's role. This can help the company avoid a severe financial burden and maintain productivity during the transition period.

Policy Structure


Premiums for key person disability insurance are determined by various factors, such as the key person's age, health, occupation, and the policy's coverage amount. The company typically pays these premiums, as it is the beneficiary of the policy.

Waiting Period

The waiting period refers to the length of time between the onset of the key person's disability and when the policy begins to pay benefits. This period can vary, but it is typically between 30 and 90 days.

Benefit Period

The benefit period is the duration for which the policy pays out benefits. It can range from a few months to several years, depending on the policy's terms.


Some key person disability insurance policies may have specific exclusions, such as pre-existing conditions or certain types of disabilities. Companies should carefully review the policy's terms and conditions to understand any limitations or exclusions.

Features of Key Person Disability Insurance

Identifying Key Persons in a Business

Criteria for Determining Key Persons

Key persons in a business are those individuals who have a significant impact on the company's success. To identify these individuals, companies should consider the following criteria:

  • Revenue generation: Employees who directly contribute to the company's revenue, such as top salespeople or executives.

  • Specialized knowledge or skills: Employees with unique expertise or qualifications that are critical to the business's operations.

  • Leadership roles: Individuals in high-ranking positions who are responsible for making crucial decisions and managing teams.

Examples of Key Persons

Some examples of key persons within a company include:

  • Owners and founders: Those who have a significant stake in the business and play a vital role in its success.

  • Top executives: C-level executives, such as CEOs, CFOs, and COOs, who are responsible for the company's strategic direction and overall performance.

  • Lead technicians or engineers: Experts in specialized fields who are integral to the company's product or service offerings.

  • Sales managers: Individuals responsible for generating and maintaining the company's revenue stream.

Assessing the Financial Impact of a Key Person's Disability

Calculating the Potential Loss of Revenue

To determine the potential financial impact of a key person's disability, businesses must estimate the potential loss of revenue that may occur due to their absence.

This calculation should consider factors such as the key person's contribution to sales, the potential loss of clients or contracts, and the overall impact on the company's market share.

Estimating Costs of Recruitment and Training

Another important aspect to consider when assessing the financial impact of a key person's disability is the cost of recruiting and training a replacement.

These costs can include advertising, interview expenses, signing bonuses, and the time and resources required for onboarding and training new employees.

Evaluating Impact on Client Relationships and Contracts

A key person's disability may also have a significant effect on client relationships and contracts. Companies should assess the potential impact of losing a key employee on client trust, contract renegotiations, and the possibility of clients seeking alternative service providers.

Assessing Potential Loss of Business Opportunities

Lastly, businesses should evaluate the potential loss of business opportunities due to a key person's absence. This may include the inability to pursue new contracts, delayed product launches, or missed opportunities for strategic partnerships and expansions.

Choosing the Right Key Person Disability Insurance Policy

Assessing Coverage Needs

Benefit Amount

When selecting a key person disability insurance policy, companies must carefully assess their coverage needs. This includes determining the appropriate benefit amount, which should be based on the potential financial impact of the key person's disability, as discussed in the previous section.

Waiting and Benefit Periods

The waiting and benefit periods should also be considered when choosing a policy. Companies should strike a balance between a reasonable waiting period and a benefit period that provides adequate financial protection for the business.

Comparing Insurance Providers

Reputation and Financial Stability

When selecting an insurance provider, companies should research the insurer's reputation and financial stability. This includes looking at customer reviews, the provider's financial ratings, and its history of handling claims.

Customer Service and Claims Support

Good customer service and claims support are crucial when choosing an insurance provider. Companies should ensure that the insurer has a dedicated claims team and a responsive customer service department to assist during the claims process.

Customizing Policy Features

Riders and Endorsements

Companies can customize their key person disability insurance policy by adding riders or endorsements. These additional features can provide extra protection or benefits, such as cost-of-living adjustments, partial disability coverage, or the option to increase coverage in the future without medical underwriting.

Adjusting Coverage as Business Grows

As a business grows and evolves, its key person disability insurance needs may change. Companies should regularly review and adjust their coverage to ensure it remains adequate and relevant to their current situation.

Implementing and Managing Key Person Disability Insurance

Communication With Key Employees

Explaining the Policy and Its Purpose

When implementing key person disability insurance, it is essential to communicate openly with key employees about the policy and its purpose.

This includes discussing the reasons for obtaining the coverage, how it benefits the company, and addressing any concerns or questions the key employees may have.

Addressing Concerns and Questions

Key employees may have concerns or questions about the policy, such as how it affects their personal disability insurance or the company's commitment to their well-being.

Companies should address these concerns and provide clear explanations to ensure the key employees understand the policy's benefits and purpose.

Regular Policy Review

Assessing Changes in Key Personnel

Companies should regularly review their key person disability insurance policies to ensure they continue to provide adequate coverage. This includes assessing changes in key personnel, such as the departure or promotion of key employees or the addition of new key roles within the company.

Adjusting Coverage as Needed

Based on the regular policy review, companies may need to adjust their coverage to account for changes in key personnel or the financial impact of a key person's disability. This may involve increasing or decreasing the benefit amount or modifying the waiting and benefit periods.

Claims Process

Documentation and Filing Requirements

In the event of a key person's disability, companies should be prepared to initiate the claims process. This includes gathering necessary documentation, such as medical records, proof of disability, and financial statements.

Companies should be aware of the insurer's specific filing requirements and deadlines to ensure a smooth claims process.

Working With the Insurance Provider During the Claim

Maintaining open communication with the insurance provider during the claims process is crucial. Companies should provide all requested documentation promptly and stay in regular contact with the insurer's claims team to address any questions or concerns.

This collaborative approach can help expedite the claims process and ensure that the company receives the appropriate benefits in a timely manner.


In conclusion, key person disability insurance is an essential form of coverage that can help protect a company's financial stability in the event of a key employee's disability.

By understanding the features, benefits, and implementation process, businesses can make informed decisions about the right policy for their needs. Regularly reviewing and adjusting coverage as the business evolves ensures that the insurance remains relevant and effective.

Companies should prioritize open communication with both key employees and insurance providers to foster a successful partnership and promote business continuity.

Key Person Disability Insurance FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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