The challenge: A key person within an organization plays a critical role in driving revenue, managing essential duties, and maintaining valuable knowledge and relationships. If this individual becomes disabled, the organization often faces significant time and financial losses as it adjusts and searches for a suitable replacement.
Successful advisors are adopting a proactive approach by evaluating the risks tied to key personnel and C-suite executives. They thoroughly examine their clients' businesses, asking three critical questions to uncover potential weaknesses:
- What impact would it have if your key person were unable to perform their duties?
- In the event of an unexpected departure, who has the ability to smoothly take over the company?
- What would be the financial strain of hiring an external replacement if there’s no internal backup plan?
The solution: Key Person Disability Insurance provides funds to the business to help overcome the financial challenge of the loss of a key person when they suffer a disability. This coverage helps mitigate the disruption caused by the loss of a key person by providing funds directly to the business. These benefits can be used as needed, whether to offset recruitment and hiring costs or to replace lost revenue.
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Consider a real-world example: A private equity firm in Chicago, which routinely purchased key person life insurance for new acquisitions, faced a significant setback when the CEO of one of their key portfolio companies suffered a disabling stroke.
The firm had a $6 million key person insurance requirement for an upcoming acquisition. However, when the CEO became disabled, they realized that their existing key person life insurance policy didn’t cover this scenario. The firm incurred substantial financial losses as the CEO could no longer fulfill their duties.
Recognizing that the risk of disability is three to four times higher than the risk of death during working years, the insurance advisor recommended a comprehensive key person policy that included both death and disability coverage. The firm, fully aware of the financial impact of losing a CEO to disability, acted on the advice and expanded their key person insurance to include disability protection.
The advisor secured $6 million in key person life insurance through the domestic market and came to us for the disability portion. We provided a tailored solution, binding $6 million in key person disability insurance that would pay out a lump sum after 12 months if the CEO of their newly acquired company became incapacitated.
The advisor not only strengthened their relationship with the private equity firm but also crafted a comprehensive key person plan that covered both death and disability.
For advisors to excel in this field, they must build trust with their clients, understand the products thoroughly, and, most importantly, ask the tough questions. When discussing key person life insurance policies, don't overlook the critical importance of protecting your clients from the higher risks posed by disability. It’s a proactive measure that can make all the difference in maintaining the stability of their businesses.
