Proper Business Planning with Disability Insurance

Disablement is like the analogy of throwing a stone into a pond.  There is certainly a ripple effect.  Not only is the disabled person directly affected and in over their head, but the resulting waves hit everyone and everything in the vicinity.  Of course, close family and friends are reeling from the consequences, but so too are the disabled person’s coworkers and employers.  And if that person just happens to be a business owner, the negative results are compounded, additionally affecting 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 business plan will help ensure business continuity and promote succession even in the unfortunate, seemingly helpless shadow of a business owner stricken by temporary or permanent disability.  

Business overhead expense (BOE) disability insurance is one of the greatest safety nets available to the American business owner.  The product aims to provide vital reimbursement for the monthly liabilities for which an owner is responsible in case of that owner’s total or partial disablement.  If an insured person were to suffer a disability due to accident or illness, the insurance company pays monthly benefits after a short elimination period to cover the business’ incurred monthly expenditures until the insured person can return to work or until the benefit period expires.  Benefits cover common overhead expenses including but not limited to payroll, corporate insurance premiums, utility bills, business mortgage payments, furniture rentals and equipment leasing fees.  BOE coverage keeps a company afloat so that business continues to stay 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 often utilized to indemnify business loan requirements.  Business owners regularly rely upon outside funds to manage and grow their companies, utilizing borrowed or acquired 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.  Business loans are common through large corporate institutions and smaller, local lending companies.  Entrepreneurs are also eligible for financial assistance through loans from the government-run Small Business Administration.

Many business loans being offered today require fully collateralized disability insurance, indemnifying the loan repayment schedule, sometimes including interest payments.  Lenders regularly want additional safeguards for the return on their investments against the risk of premature and unforeseen disablement of the loan guarantor.

Unfortunately, a common practice among American business owners is to assign their personal disability benefits to a third party while satisfying a lender’s loan or lease requirements.  A more common alternate avenue taken by insurance advisors is the prescription of BOE to indemnify business loan agreements.  The BOE method is frequently acceptable to commercial lenders, however, this too creates potential real-world problems.  BOE plans only cover the interest on business loans, leaving principal payments completely uninsured.

Another and more proper 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 policy holdings.  Specialty-market DI carriers have business-loan-specific disability plans which are designed to satisfy lender insurance 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, assisting with business disruption and continuity.

Another important corporate safeguard is key person disability insurance.  The physical loss of a key employee or employer to physical or mental incapacitation can understandably lead to the loss of present and future business accounts, the 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 absolute chaos, both operationally and fiscally.

Now more than ever, businesses need short-term 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 the insurance to pump vital cash payments back into the affected business.

The insurance proceeds can be used at the discretion of management, and although the premium payments aren’t tax-deductible, the benefits aren’t taxable.  The monthly proceeds of a key person DI policy are purposed to force a temporary corporate renaissance, helping to hire and train a replacement employee, promoting continuity of the firm or to economically steady the company for an eventual internal or external buy-out.

Succession planning is also vital in maintaining business continuity and balance when an owner decides to finally hang it up and enter a life of retirement.

But how do you avoid financial turmoil during a regime change and the partial or entire sale of a thriving business?  You employ a thoughtfully constructed, 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 unexpected curveballs like the permanent 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 through a lump sum or structured monthly benefit schedule to sufficiently address the monetary needs of the buy/sell contract.  Benefits usually begin after an elimination period of at least 365 days, funding the partnership agreement and allowing 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, necessary and prolific requisite for any appropriate and well managed corporate business plan.

–Published with permission from Broker World Magazine.