Disability coverage may be the most neglected and least understood area of business planning – but it’s also one of the most important.
What will happen to your business if you suffer a disability? Will it continue to operate without a loss of revenue or will you have to sell the company?
There are various forms of disability insurance that can be used to protect a business. The two main planning strategies are to protect the owner’s personal income as well as the business revenues.
The owner should purchase personal disability insurance to insure their income in the event of an accident or illness. The business should purchase disability insurance to ensure it stays up and running while the owner is recovering from a disability or to transfer/sell the business to someone else.
When it comes to protecting business revenues, the following products should be considered in the event the owner or key employee suffers a disability:
- Business Overhead Expense
- Business Loan Protection Rider
- Key Person
- Business Owner/Partner Buy-Out
- Executive Carve-Out
Business Overhead Expense
When a business owner becomes disabled, not only are they in jeopardy of losing their personal income, but they are also at risk of losing business revenue. A Business Overhead Expense policy reimburses fixed monthly business expenses such as: rent, employee wages, utilities, insurance, and maintenance services.
Business Loan Protection Rider
One of the largest expenses to a business owner is monthly loan payments. The Business Loan Protection Rider can be added to a Business Overhead Expense policy to allow the owner to use the funds to pay current and future bank loans.
Key Person Disability
A Key Person Disability policy protects the business owner should a key employee become totally disabled due to illness or injury. The policy is issued at a predetermined amount; benefits are either paid out in a lump sum or monthly payments of the lump sum. The benefits allow the business owner to offset costs such as temporary staffing, finding a replacement, recruiting and loss of revenue during training, etc.
Business Owner /Partner Buy-Out Disability Insurance
The two main triggers of a buy-sell agreement are death and disability. A Disability Buy-Out Insurance policy helps fund the buy-sell agreement to buy out a totally disabled business owner. This coverage allows the business to continue without interruption or the obligation to fund the buy-out with business assets/revenues. This policy should be purchased for each owner according to their ownership percentage.
Many key employees believe that in the case of a disability a sufficient part of their income will be replaced. This is hardly the reality. Traditional group long term disability insurance typically covers up to 60% of income – up to a monthly maximum benefit cap. This restriction to their income is often overlooked. This coverage can bridge the gap for high income earners whose income exceeds the monthly disability benefit cap. An Executive Carve-Out Plan can be offered as a form of incentive compensation by an employer to executives or on a voluntary basis.