The Importance of Excess Disability Insurance in M&A

The Importance of Excess Disability Insurance in M&A

There is a rule that prevents the U.S. president and vice president from traveling on the same plane together.

The idea being that if the president’s plane crashes, the VP is ready to take the oath of office and immediately take the reins of power with minimal disruption. It’s done for the good of the country.

It gets me to thinking about the equivalent – at least somewhat – in the corporate world.

I’m talking corporate events or retreats… perhaps in a foreign destination. They put all the C-suite people… and other key personnel… on the same plane, in the same hotel.

In some cases, I’ve seen PE firms bring all the CEOs and other important players of their portfolio companies for off-site events. Team building ropes courses or sailing trips or, as I’ve seen, even race car driving experiences.

Good fun. Great for team building… and building relationships.

But you must also consider the potential for serious catastrophe if one or more of those C-suite folks or founders or whoever else is injured…especially if they are injured enough that they can’t continue working as they have before for a significant period.

That’s what disability insurance is for. However, in the case of a truly important executive, standard disability insurance just isn’t going to cut it.

You see, with disability insurance, monthly disability payments generally max out at $15,000. And that’s not a whole lot of money for folks in PE firms.

Fortunately, there is a solution… 

When Standard Disability Insurance Does Not Cut It 

There is a specialized coverage out there, typically handled by Lloyd’s of London.

And unlike other more common insurance products, which generally have the same pricing and coverage no matter who gets it, excess disability is more specific.

A recent guest on my podcast, my colleague Lynne Rosenberg, President of my affiliate Innovative Solutions, explained the key advantages of excess disability this way:

“Take a fund manager or private equity partner who has become disabled and cannot work. Perhaps they don’t need to supplement their income because they’ve enough wealth built up.”

In other words, they, as a person, are fine financially as they recover. And if they didn’t have that money put away…standard disability coverage would supplement their income.

However, there is still a problem with this essential part of the business inactive, says Lynne:

“They have not died. So, the Key Person coverage hasn’t paid out.”

Key Person insurance is a type of life insurance that a company buys on the life of an owner, top executive, or someone else critical to the running of the business. This is somebody essential to the financial success of the company, and everything would basically fall apart if they were gone.

The company is the beneficiary of these types of policies, with the death benefit giving them enough money to stay afloat until that key person can be replaced. It gives them time to figure out a next move, which could, actually, include shutting the business.

In any case, Key Person coverage gives them time to figure things out.

Lynne recommends Key Person insurance. But, of course, she says Key Person insurance only pays out when that essential person dies, not when they become too disabled to work… even if the outcome on the health of the company is the same.

The business suffers because that leader is no longer there to contribute.

And then there are the partners, notes Lynne, who explains that the partners in the business are still there… while the disabled executive is absent but still receiving their financial compensation from the partnership. And nothing destroys relationships faster than an absent partner, she adds.

“[Excess] disability coverage is liquidity that allows the company to have choices and flexibility. The disabled partner is paid out, using the insurance claim money, so that they’re no longer a partner.”

And these policies also benefit the disabled executive. As Lynne explains, if that former partner needs money to supplement their income or pay for medical expenses, the excess disability kicks in too.

As far as limits are concerned, on standard disability insurance it’s possible to get up to $500,000 a month. With key person disability insurance – the buyout option mentioned above – is available up to $75M.

Lynne recommends making time to secure this coverage. Waiting until the last minute before a corporate retreat, for example, might not be enough time to nail down a policy, especially in the coming busy summer travel season.

She says if the key players in your company ever travel together, this coverage is essential. There is actually “one time” coverage of this type available if group travel is not common. If it’s a regular occurrence, say to meet with potential Buyers or investors, standard key person coverage is key.

In any case, going above and beyond in terms of disability insurance is key. These situations are not comfortable to talk about… especially with people with whom you have a business relationship. But believe me, having those conversations, seeking out this type of coverage, will help strengthen those relationships as they strengthen the company in times of crisis.

Please contact me, Patrick Stroth, for more information on these and other M&A insurance options at


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