Disability Income Coverage for the Small Business Owner
By Kelby Gelston
Which of your assets do you value most? Is it your home…your automobile…your
investments? Maybe it's your business. More than likely, your most valuable
asset is actually your ability to earn an income. While most individuals own
insurance to protect their homes and automobiles from unanticipated misfortune,
only 15 percent of workers currently have insurance to protect their income,
according to "Life Industry Primer", published by JP Morgan in January 2004.
According to the National Safety Council in 2003, income lost through disability
is two times as great as auto accident losses and three times as great as fire
losses. Disability Income (DI) insurance can replace a portion of your lost
income should a disabling injury or illness prevent you from working.
Disability Income Insurance for Your Business
DI insurance, while fundamental for individuals, is just as necessary for
small business owners. If just thinking about the occurrence of a disability
in your business or professional practice makes you feel uncomfortable, imagine
what it might feel like if one actually occurred. It would be no small matter
to the life and continued viability of the business. In the event of the disability
of a small business owner or of a partner in such a business or practice, there
are a number of things with which DI insurance can help:
- Paying the operating expenses of the business
- Funding partnership buyouts
- Replacing lost earnings of a business owner or an employee on a tax-advantaged
basis to the business
- Providing return-to-work benefits to a business owner or his or her employees
- Protecting and maintaining retirement contributions of a business owner
or of an employee
Let's focus on three of these areas.
Business Operating Expenses
A Business Overhead Expense (BOE) disability policy can help pay the costs
of maintaining your business should you become disabled. If a disability occurs,
the costs of running the business will not go away. Payroll, rent, leases and
utilities will still need to be paid whether you are working or not. BOE insurance
can be put into place to cover these and other expenses while you are out of
work for an injury or sickness. This may allow for the business to continue
to operate and grow while you are out and still be profitable when you are
able to return to work.
Buy-Sell Agreements
With a buy-sell DI insurance plan in place, business succession preparation
can truly be in force should an unexpected accident or illness occur. Many
firms have buy-sell agreements in place, typically funded with life insurance,
in case of the unexpected death of a partner. However, for the more likely
scenario, a disabling injury or illness, there is often no DI insurance in
place to fund a buyout. A 2001 statistic from the Health Insurance Association
of America bears this out: "During the course of your career you are three-and-a-half
times more likely to be injured and need disability income insurance than you
are to die and need life insurance." It is certainly preferable to fund a buy-sell
with DI policy contract benefits than to take money from company profits to
fund an agreement.
Maintenance of Retirement Plan Contributions
Contributions to a qualified retirement plan can only be made if an individual
is working, and a total disability will stop all contributions – both
those made by the individual and those made by the employer. With a retirement
protection DI policy, or a rider on an individual DI policy, you can continue
your retirement contributions even if you are unable to continue working. A
retirement protection DI policy pays benefits to an irrevocable trust while
you are out on claim. The trusts generally offer a wide range of funding options
to aid the insured in selecting options that best fit their needs and investment
objectives. A retirement DI policy can help the insured make 100 percent of
their retirement contributions, including the employer portion.
To have an effective personal financial strategy in place you must have addressed
the possibility of an unexpected injury, illness or death, and so, too, for
an effective business financial plan. While you cannot predict the future you
can address the probability of the occurrence of unfortunate events and prepare
for them now when your efforts can be the most effective.
Kelby Gelston is an associate of FranklinMorris,
Coordinating Broker for the Bar Associations Insurance Agency, Inc. For more
information on the insurance benefits available to MSBA members, visit www.msba.org/departments/membership/baia/.
