How DI Fits into Business Planning – Part 2
Last week we discussed how overhead expense and loan indemnification disability plans are vital tools in managing business disruption, but there are other insurance products that are just as important in the grand scheme of business planning.
Key person disability insurance is an important planning safeguard. The physical loss of a key employee or employer can understandably lead to loss of business accounts, loss of relationships with important contacts, not to mention the office workflow issues that inevitably arise during an extended absence. Corporate capital is typically allocated to finding replacement staff who then need to be trained and paid an appropriate salary. The costs of the loss of a key person due to disability can easily put a company into financial and operational turmoil.
Now more than ever, businesses need insurance solutions to minimize corporate risk against the disablement of an owner or key employee. Key person DI policies provide total and partial disability benefits, allowing for cash to be pumped back into the affected business.
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The monthly proceeds of a key person DI policy are purposed to force a corporate renaissance, helping to hire and train a replacement employee, promoting continuity of the firm or to economically steady the company for an eventual buy-out.
Succession planning is also vital in maintaining balance when an owner decides to retire.
But how do you avoid financial problems during a regime change and the sale of a thriving business? You employ a fully funded buy/sell agreement, outlining the procedural turnover of the business to one or more individuals. This is a natural and progressive step as long as life continues as expected. But we all know that isn’t always reality. Life can throw curveballs like the disablement of the business owner, forcing a premature buy-out of the business.
In most instances of unforeseen disability, successors won’t have the capital necessary to fully-fund the purchase of the disabled owner’s shares. Chaos ensues and the business suffers or defaults. The solution is buy/sell disability insurance. A comprehensive buy/sell DI policy will properly fund a purchase agreement at the time of the permanent disability of an owner to sufficiently address the monetary needs of the buy/sell contract. Monthly or lump sum permanent disability benefits fund the partnership agreement and allow the other owners to essentially purchase the disabled owner’s financial stake in the corporation.
Whether it be buy/sell insurance, key person, overhead coverage or loan indemnification, disability protection is a primary requisite for any well managed corporate business plan.