3 Tools to Protect Businesses from the Disability of a Partner or Key Employee.

Jerry C. Thomas, CFP®Business Planning (Disability Ins.), Disability Insurance Planning

Executive Summary

Below is what we will review in the following article. 

  • Tool 1: Disability Buy-Out Planning (Fund your Plan)
  • Tool 2: Key Person Replacement Planning
  • Tool 3: Business Valuation Service


Many businesses never consider what impact the disability of an owner, partner, or key employee could have on the business.  This type of risk management usually doesn’t take place due to limited expertise in this field. Risk management is the foundation of every solid financial plan. Without the correct solutions in place a business can fall apart leaving its owners, partners and employees at risk. Below are three tools business owners can use to protect their business from the financial hardship due to the disability of an owner, partner, or key employee.

Tool 1: Disability Buy-Out Planning (Fund your Plan)

You may have a buy-sell plan in place, the question we always ask is what is it funded with? You are constantly relying on your key people — your top salesperson, software engineer or COO, but they in turn rely on you. As an owner, you too are the most critical component to the success and future of your business. Furthermore, if you or your partner became too sick or hurt to work, you’d be facing two major challenges:

  • How to keep the business open without a key member of the team
  • How to fund the transfer of the business to the non-disabled owner

Providing the funding due to disability.

No one can predict if, when, and how an owner will become permanently disabled, it’s not just emotionally stressful but also financially stressful. However, you can take proper steps to minimize yours and your teams stress. There are two solutions that work together to help facilitate an easier transition.

  • Key Person Replacement — Will pay benefits to the business if a key person (or an owner) becomes totally disabled. The remaining owner or owners can use the benefits for whatever their need. Usually businesses will use the funds to cover recruitment costs, pay for temp staffing, replace revenue or deal with other business needs.
  • Disability Buy-Out — Will provide the funding for the purchase of a totally disabled owner’s interest in the business under a buy-sell agreement. This coverage allows the remaining owner(s) or a key employee to continue to run the business.


By using these two disability insurance policies you are able to provide the funding needed to keep the business moving forward. These policies tend to be affordable and provide piece of mind knowing even in difficult situations the business will move forward. With fewer financial roadblocks the remaining owners will easily make important decisions about the future of the business.

  • Assumptions: $250,000 annual income, non- tobacco, Iowa resident, Age 40.
  • Key Person Replacement – 5A Class select, 10% Select Occupation Discount, 90-Day Elimination Period, $20,000 monthly benefit to day 180, $440,000 lump sum benefit.
  • Disability Buy-Out – 6A Class 5% Preferred Business Owner Discount, 365-day Elimination Period, $1,000,000 lump sum benefit.

Tool 2: Key Person Replacement Planning

What are the most valuable assets to your business? Equipment? Patents? Software? For most businesses their most valuable assets are their people especially their key employees.  Your key employees generate revenue, manage major responsibilities and typically hold valuable client relationships or knowledge on the business.

One of the most expensive endeavors for a company is to have to replace a key employee.  If a key employee is no longer able to work due to sickness or disability, there is a way to provide the funding for lost revenue and replacement costs. The cost of finding a replacement or hiring a headhunter to coordinate a replacement can be expensive especially when the replacement has specialized skill set or relationships.  This risk is not only costly from a loss of revenue but also from an increase in expenses to coordinate the search for a replacement.

How does Key Person Replacement Planning work?

Key person replacement disability insurance can help fund loss revenue and provide the funding needed to hire a replacement. Below is the structure on how an agreement like this works. Your business is the owner and beneficiary of the polices. If the unexpected were to occur, death or disability, the business would receive cash, generally income-tax free, to help replace lost revenue and provide funds for a replacement.

  • Key Person Life insurance — Available as term or a permanent insurance policy that provides a death benefit to help the business overcome the financial challenge at the death of the key employee.
  • Key Person Replacement insurance — Provides your business funds to help overcome the financial challenge of the loss of a key employee if they become too sick or hurt to work.

Things to Consider:

Key person coverage can help you…

  • Offset the cost of finding a replacement and loss of revenue during training.
  • Cover temporary staffing costs.
  • Demonstrate financial stability to creditors and clients.

Tool 3: Informal Business Valuation Services

What is usually the most expensive parts of figuring out buy-sell planning? Its determining how much your business is worth.  Over the years more insurance companies are providing services to help you and your business partners determine the value of your business. Insurance companies use specialized software that help determine the value of your business based on your own financial data. These informal valuations are not considered formal and would not be used in an actual buy-out to determine the true value.  Their purpose is to provide a snapshot of an approximation of the value of the business to help develop coverage levels for disability and life insurance policies.

How does an Informal Business Valuation work?

Business owners will complete a questionnaire on the structure and details of the business. Furthermore, the business will provide a minimum of three years of tax returns.  This information will be used to generate the Informal Business Valuation. Upon completion of the valuation the valuation team, advisor, and business owner(s) will conduct a call to review the document to make sure items were not miss calculated or if there are additional details to consider.  Some information gathered during this conversation is value of proprietary technology, outstanding receivables, or new products or services coming to market that may impact the overall value.

Example of an Informal Business Valuation


In conclusion protecting your business is important to you, your partners, and your employees. By implementing the right risk management plan you’ll be able to successful manage any major issues your business may unexpectedly incur. By incorporating key person replacement planning and disability planning you’ll be able to protect your business and investment from any outside challenges.

How we can work together:

If you don’t have an insurance or financial advisor, we can help you directly or help you find a partner. Contact us below to schedule a call or email us with any questions you may have.

If you do have an insurance or financial advisor, we can work with them as a team to help you review your insurance and risk management needs.

If you are an insurance or financial advisor, we are a full-fledged Brokerage General Agency, we can help you as your back office specialist or assist any of your clients in planning.