Part of our guide: Disability Income Insurance: Solutions, Tools and Guides →
When a key employee becomes totally disabled, the business faces real costs: finding a replacement, training them, and covering the gap in the meantime. Key person replacement insurance is designed to pay for exactly that.
Key takeaways
- The employer owns the policy and receives benefits if the key employee becomes totally disabled.
- Benefits can be paid as a lump sum, or a combination of monthly payments and a lump sum.
- Premiums are guaranteed, premiums are waived after the elimination period, and separate periods of disability can count toward it.
Recruiting and training a replacement for a key employee can cost far more than their salary. Key person replacement coverage pays for it.
How it pays
If the insured key employee meets the policy’s definition of total disability, the employer receives a lump sum or a combination of monthly and lump-sum payments to cover the loss of the employee and the cost of hiring and training a replacement. Common uses include recruiter fees, training, temporary staff, and lost productivity.
Definition of total disability
Typically, the key employee must be unable to perform the duties of their key person occupation and unable to work in any comparable occupation for the business, by duties or earnings.
Key features
- Guaranteed premium: won’t increase because of changes in the employee’s health.
- Flexible payment: lump sum, or monthly plus lump sum.
- Waiver of premium: premiums are waived once the employee is disabled and the elimination period is met.
- Interrupted elimination period: separate periods of disability can be combined to satisfy the elimination period, if they occur within a window twice as long as the elimination period (and less than a year).
Related coverage
Key person replacement is one of several business disability solutions; see key person disability insurance and business loan protection.
Frequently asked questions
What does key person replacement insurance pay for?
Costs of losing a key employee to total disability, such as recruiting, training a replacement, and temporary staffing.
Who owns a key person replacement policy?
The employer owns the policy, pays the premium, and receives the benefits.
Can key person replacement pay a lump sum?
Yes. Benefits can be a lump sum or a combination of monthly payments and a lump sum.
Reviewed by Tim Fuller on 2026-09-25
Tim Fuller
President, SRS Inc.
Tim leads SRS Inc., a full-service IMO (Independent Marketing Organization) and BGA (Brokerage General Agency), connecting independent financial professionals with life, annuity, disability income, and long-term care solutions from 60+ carrier partners.
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