Key Person Disability Insurance in Canada: 2024 guide
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Discover the methodologyKey person disability insurance ensures that a company can survive when a key employee is unable to work. But did you know that only around 10% of businesses in Canada have key person disability insurance?
What happens to the remaining 90% of uninsured companies when a key person becomes disabled? Are you one of them? Do you have a financial plan to cover lost expenses? The unexpected expenses when losing the best salesperson or a C-suite executive can mount up quickly and put your business under incredible financial stress if you don't have the right risk management in place.
Key person disability insurance steps in to fill the void and provide financial aid to companies in these situations. But how does it work? What does it cover? Read our comprehensive guide below.
Key Person Disability Insurance: Key Takeaways
- Key person disability insurance can be invaluable to your company’s financial stability.
- Benefits can be used to replace key employees, replace lost income, and preserve business value.
- It increases investor confidence by demonstrating effective risk management.
- Key person disability insurance is not tax-deductible.
Start exploring complete offers by clicking below:
The iA Financial Group's Superior Program offers maximum coverage of $120,000 and covers professional classes from 4A to C. With a minimum work time of 21 hours per week, this insurance does not require a minimum pre-tax income. It stands out with non-taxable monthly benefits and a vocational rehabilitation program. Ideal for newcomers, it includes four optional riders and can be renewed up to the age of 70.
Beneva's Disability Insurance offers a maximum coverage of $72,000 and covers professional classes from 4A to B without requiring a minimum income. Renewable until the age of 65, this plan stands out with its premium refund feature and the possibility of combining with group insurance. It includes four optional riders and does not require a medical questionnaire, offering great flexibility.
Canada Life's The Independence Protection Insurance offers maximum coverage of $300,000, one of the highest in the market. It covers professional classes from 4A to B and requires a minimum net income of $35,000 per year. This plan includes 13 optional riders, a partial disability option, and flexible benefit periods of up to 120 months. Non-cancellable until age 65, it is suitable for part-time and seasonal workers without a medical questionnaire.
What is key person disability insurance?
Key person disability insurance is a specific type of business interruption insurance that provides financial compensation to companies if and when a key employee becomes disabled and is unable to work. When this happens, the insurance provider will pay the monthly key person disability benefit to the company so that they can cover any financial expenses that come with the loss of an important employee.
Similar to the way that private disability insurance provides a monthly payment to individuals to replace their income, key person disability insurance ensures minimal disruption to the ongoings of a business by providing money that can be used to cover any number of unexpected costs.
In short, you can say that key person disability insurance is a financial lifeline that allows companies to continue with business as usual with minimal financial downsides.
To get a quick idea, you can check out the best disability insurance options in Canada right here. Use our free comparator below to explore multiple plans, compare their coverage, and get personalized quotes in no time.
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How can key person disability insurance help your business?
Key person disability insurance will help your business by providing it with a monthly benefit if one of your key employees can no longer work due to a disability. The money received is a crucial part of any business financial plan and the loss of an employee on the financial aspect of a company should not be understated.
Example 1: Salesperson suffers a disability
If your best salesperson is forced to miss time off work due to an injury or illness, your company will surely suffer major financial earnings in the time they are away. Additionally, if the star employee is placed on sick leave for 6-12 months, it will likely take just as long to find, hire and train a replacement. With key person disability insurance you don’t have to worry about replacing your key salesperson as the monthly benefit will help subsidize the short-term loss of your employee’s sales.
Example 2: CFO of a start-up
Consider a start-up with rapid growth and huge plans for the future, where the CFO is responsible for the company’s finances. From forecasting cash flow to securing funding and managing key financial projects, the company would struggle if the CFO was unable to work.
Now imagine that this CFO is in a car accident, suffering an injury that will take a year of rehab before the CFO recovers.
During that time, the company may lose funding and have no one to manage the company’s day-to-day financial operations with the same level of expertise. Furthermore, the CFO’s intimate knowledge of the start-up would be impossible to replace and the recruitment costs alone will eat into the company’s budget.
While key person disability insurance won’t get the CFO back quicker, it will provide the company with a steady influx of cash so that they can cover hiring costs and outsource financial projects where necessary.
It should be noted that key person disability insurance is not only beneficial for large corporations that are required to have risk management policies in place. Small businesses are nearly more reliant on key individuals than large companies and losing one such individual may mean you lose an employee that wears many hats.
What does key person disability insurance cost?
The cost of key person disability insurance in Canada varies widely depending on several factors. They are typically:
- Age: Older individuals usually pay higher premiums.
- Health: Overall health and medical history affect rates.
- Job Risk: Riskier occupations can lead to higher premiums.
- Coverage Level: More coverage results in higher costs.
- Policy Terms: Things like benefit periods and waiting times matter.
- Lifestyle: Smoking or risky hobbies can increase premiums.
- Business Role: The insured's importance to the business is also considered.
However, to provide a general idea of how much one can expect to pay for key person disability insurance, here are some sample figures:
| Age/Profession | Coverage Amount | Estimated Monthly Premium |
|---|---|---|
| Small Business Owner (Age 35) | $5,000 | $75 - $150 |
| Professional (e.g., Lawyer, Age 45) | $10,000 | $200 - $400 |
| Executive (Age 50) | $15,000 | $450 - $900 |
Please note, that these are estimated figures for illustrative purposes. Actual premiums can vary based on individual circumstances and insurance provider policies. It's best to get individual quotes from providers. Look no further! Use our free comparator tool below to compare plans and get instant quotes.
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What does key person disability insurance cover?
Key person disability insurance coverage varies depending on numerous factors surrounding the insured employee(s). Due to this, it is impossible to give exact coverage limits without first consulting with an insurance representative and providing them with several specific details.
However, we have compiled a brief list below of some of the general guidelines that affect the overall key person insurance coverage.
- Employee’s salary: Key person disability insurance sometimes covers a multiple of the insured person’s salary, so income often dictates coverage.
- Expected recruitment costs: Coverage also tends to reflect recruitment costs which include recruiter compensation, excess salaries, and successor training.
- Revenue loss/contribution to profits: Sometimes the key person's disability insurance cover will take into consideration the contribution to profits of the insured and the expected revenue loss due to their absence from work.
- Debt and credit charges: If a key person is unable to work, the company may have to increase debt to survive which may be considered in the insurance coverage.
Waiver of Premium
Before purchasing your key disability insurance policy, review it to see if it has a waiver of premium clause. This perk waives the need for the company to pay any premiums that come due while the key person remains disabled, thereby saving the company money.
Do I need key person disability insurance?
If you’re still undecided on whether or not you need key person disability insurance to cover your most important employees, the following questions may help you identify reasons why this insurance may be useful.
- Do you have an employee who, if stopped working, would drastically impact your business income?
- Would you be able to fill this employee’s position readily, through internal vertical or lateral mobility?
- Would the loss of an employee make it impossible to conduct critical functions?
- Does the loss of an employee risk the loss of important clients and/or future funding?
- Will it take longer than a couple of months to replace your employee?
- Are the technical skills and experience of an employee niche and difficult to replace?
- How much will the company lose in revenue should an employee suddenly be unable to work?
What are the benefits of key person disability insurance?
There are several advantages to having key person disability insurance for your business, and the fact that it can provide financial stability in times of upheaval is just an overarching consideration.
To know exactly how key person disability insurance will benefit your business, you have to put together a comprehensive business strategy, using foresight and responsible management to ensure business continuation.
The following breakdown of specific key person disability insurance benefits may help you develop your business continuation considerations.
Key Person Disability Insurance for Financial Protection
- Lost revenue and profits: Key employees often generate significant revenue for your business. Losing them due to disability can severely impact the company's earnings and overall finances. The insurance provides funds to cover lost income and maintain operations.
- Hiring replacements: Recruitment and hiring costs are detrimental to business profits when unexpected. Key person insurance will provide an influx of money that can pay for recruitment fees, training, and unplanned overtime.
- Preserve business value: Without a key person, the business might lose clients or contracts due to one individual not being able to complete projects. By ensuring operational stability you will maintain the trust of your important clients who know that your risk management policies helped avert business interruptions.
- Protects creditworthiness: Inability to fulfill financial obligations due to a key person's absence can damage creditworthiness. Key person disability insurance helps maintain good credit, ensuring access to future loans and financing.
Key Person Disability Insurance for Business Continuity
- Facilitates smooth transition: The insurance provides resources to find and train a replacement, ensuring a smoother transition between employees and projects which minimizes companywide business disruption.
- Maintains employee morale: Employees who know that there is a pre-determined plan in place to help ease the workload if a colleague is unable to work will be less stressed than employees who have to work overtime due to a company’s inability to plan.
- Enhances investor confidence: Key person disability insurance demonstrates responsible risk management, which can boost investor confidence and attract future investment.
Key Person Disability Insurance Beyond Financials
- Protects the legacy and reputation: Key people often embody the company's culture and values. Having key person insurance allows a business the financial freedom to take time to find the right replacement.
- Reduces personnel stress: A company’s financial stress usually reverberates throughout the entire workforce, but having an influx of income limits the stress from C-Suite executives right the way through to ground-floor employees.
If you’re considering business insurance for your company, the easiest way is to compare several policies at once and get free quotes using our free comparison tool below.
Who is a key person in your business?
Within your company, a key person will be an employee whose individual skills, knowledge, and abilities are so unique and valuable that if the person is no longer able to perform your company will suffer serious financial setbacks.
This can be anyone from a skilled technician to a successful salesperson, C-suite executive, or an assistant who does all the office administration and allows other employees to get on with their duties.
In essence, a key person is someone whose day-to-day contributions to the company are crucial to its immediate and long-term success. This also extends to a situation where the loss of an employee would impact the business financially and affect the morale of other employees.
Key personnel who may need disability insurance therefore include, but are not limited to:
- Successful salespeople
- Lead/executive developers
- C-suite executives
- Managing Directors
- Business owners
Additionally, key employees encompass any employee who:
- Secures significant deals on behalf of the company
- Maintains important client relationships
- Organises the day-to-day operations of a company
- Have a specific set of skills not easily replaced
- Loyal, long-term employees that boost the morale of staff around them
Identifying employees within your business that require key person disability insurance is a crucial step in risk management. By completing this step and recognizing their importance, businesses can protect themselves against any detrimental loss.
What is the difference between key person disability insurance and key person life insurance?
Key person insurance is not the same as key person disability insurance. The former provides one large lump sum payment to a company if an insured employee passes away, whereas the latter provides the company with a monthly disability benefit if the key employee is unable to work due to a disability.
Deciding whether key person insurance or key person disability insurance is right for your company may be tricky. However, one fact that may sway the needle towards key person disability insurance is the fact that an individual suffering from a disability that inhibits them from working over the short-term is much greater than the risk of a working-aged individual passing away.
Of course, if the company has the budget then they could opt for both insurance policies, or look for key person life insurance that also provides the option to add-on disability cover for a slight premium increase.
Is key person disability insurance taxable?
Key person disability insurance premiums are not tax deductible because key person insurance is not considered a business expense. Due to this, some companies may be slightly put off by the idea of purchasing the insurance.
However, since key person disability insurance is paid for with after-tax earnings, any benefits received if/when a key person is unable to work will be received tax-free. It is always worth consulting with a tax professional to understand the tax implications of key person disability insurance fully for your business.
Good to know
To get a more comprehensive understanding of taxes related to disability insurance, read our complete guide, "Is disability insurance tax deductible?"
What are the best providers of key person disability insurance in Canada in 2024?
In Canada, several leading insurance companies offer key person disability insurance, each with its unique features and benefits:
- Canada Life Disability Insurance: It is recognized for offering a wide range of additional coverage options, known as riders, allowing for a high degree of policy customization. They are particularly favored for less specialized job roles.
- Desjardins Disability Insurance: Desjardins caters to a diverse group including employees, the self-employed, and business owners. They offer flexible plans that can be tailored in terms of monthly benefit amounts and other optional features.
- Manulife Disability Insurance: Known for serving professionals and executives, Manulife also provides options for recent graduates. They offer the unique feature of converting disability insurance into long-term care policies.
- RBC Disability Insurance: RBC stands out for its non-cancellable policies and offers a range of disability insurance products with various customization options through additional riders.
