How DI Fits into Business Planning – Part I
There are many repercussions when serious illness or injury strikes and keeps someone from being able to work. Not only is the disabled person directly affected and in over their head from health, emotional and financial standpoints, but the results affect everyone and everything associated with that person. Close family and friends are reeling from the consequences, but so too are the disabled person’s coworkers and employers. And if that person is a business owner, the negative effects are compounded and passed on to business partners and employees. The disablement of a business owner can be a financial catastrophe and an operations nightmare, but it doesn’t have to be.
Properly employing various disability business products into an astute financial plan will help ensure business continuity and promote succession even in the unfortunate, seemingly helpless shadow of a business owner stricken by the inability to work.
Business overhead expense (BOE) disability insurance is one of the greatest safety nets available to the American business owner. The product provides vital reimbursement for monthly liabilities for which a disabled owner is responsible. Benefits cover common expenses including payroll, corporate insurance premiums, utility bills, mortgage payments, furniture rentals and equipment leasing fees. BOE coverage keeps a company afloat so that the business stays open, employees remain on the payroll and income is maintained until the disabled owner can either return to work or effectively transfer or sell the business.
Overhead expense coverage is also utilized to indemnify business loan requirements. Business owners regularly rely upon outside funds to manage and grow their companies, using borrowed capital for purchases and leases on big-ticket items such as medical equipment, industrial fabrication machinery, books of business and real estate. That capital can come in the form of outside investments, governmental grants and public or private loans.
Many business loans being offered today require fully collateralized disability insurance, indemnifying loan repayment schedules, sometimes including interest payments. Lenders regularly want safeguards for the return on their investments against the risk of unforeseen disablement of the loan guarantor.
Unfortunately, a common practice among business owners is assigning their personal disability benefits to a third party while satisfying a lender’s requirements. A more common alternative taken by insurance advisors is the prescription of BOE to indemnify loan agreements. The BOE method is sometimes accepted by commercial lenders, however, this can create potential problems. BOE plans only cover the interest portions of business loans, leaving principal payments completely uninsured.
A more appropriate option for borrowers is the purchase of a separate, loan-specific indemnification disability plan that protects independently from a client’s personal disability or BOE benefits. A loan-specific disability plan is designed to satisfy lender requirements, protecting both the principal and interest payments and mitigating the potential financial burdens of a borrowing business owner. Loan DI policies allow for complete indemnification, leaving other important personal and business disability insurances intact, promoting business continuity.
To be continued…