How Much Key Person Disability Insurance Do You Need?

Determining the amount of key person disability insurance is a bit different than the way we calculated life insurance needs. There are three ways you can choose to determine the amount of disability benefit paid to the company (not the key person – this is to protect the business' finances, not the key person's).

Key Person's Gross Income

No calculation needed, if the key person is disabled, the corporation will receive 1/12 of the key person's annual salary, monthly. This provides you income sufficient to pay a replacement until they're properly trained and can fully step into the role left vacant by the disabled key person.

Monthly Payment of a Business Loan

If the key person is disabled, the corporation will receive the amount of the monthly loan payment, each month. This can help you make your case for a business loan, it provides additional reassurances to the lender that the loan will be paid even in the event of the disability of a key person.

Monthly Business Expenses

Applies if the key person is the business owner. In this calculation, 80% of the monthly business expenses are paid as a benefit. This coverage keeps the lights on and employees paid while the business owner is disabled, or until a solution is found. Common with doctors and other practitioners where the corporation centers around one individual, but has business infrastructure.

Further details on these three plans are laid out in more detail in the types of disability insurance article.