Key Person Disability Insurance
In many cases, the most valuable asset a business has is one or more “key employees”. While the employee may be covered by individual disability insurance and even worker’s compensation, if they were to suffer a disabling illness or injury, the business itself stands to lose significant earnings through that loss. Key-man disability insurance is designed to insure against this potential loss, for the sake of the business.
Small to Large Businesses Disability Coverage
Small businesses may rely heavily on a sole individual, without whom the business would quickly fail. However, even medium and large sized businesses rely much more on some individuals than on others. Losing these key employees can mean a huge potential loss in revenue or, worse still, it could mean the end of the business completely.
Determining the Financial Value of an Individual
Any company looking to take out a key person disability insurance policy needs to consider all of the financial impacts and cost implications of losing that employee. Consider the direct revenue that individual brings in to the company and how much it would cost to find and train a suitable replacement. Hiring a new recruit can be a lengthy process for some positions, and they will almost certainly require some time to become proficient in the new position. All of these factors need to be considered when determining the financial value of a key member of staff, partner, stakeholder, or any other individual.
Monthly or Lump Sum Payments
Companies usually have two options regarding a financial payout; monthly repayments or a single lump sum payment. Monthly repayments usually continue for a period of between 6 months and 2 years because it is assumed that a candidate can be found and adequately trained within that period. Lump sumps are calculated using this same period but the entire settlement is made upon the disability to that key member of staff.
Key Person Disability Insurance
Once a payment has been made, it is at the discretion of the company as to how the money is spent. There are usually no stipulations on whether it should be used to train an existing staff member or start a hunt to find a new one.
Business Overhead Expense (BOE) or Professional Overahed Expense (POE)
As a business owner, you are responsible to pay expenses to keep the business running. If you became too sick or injured to work, consider how you would be able to continue to pay rent, payroll, etc…
Business Overhead Expense (BOE) insurance reimburses the disabled business owner in the event they can not work. It covers the ongoing operating expenses by paying monthly benefit to keep the business afloat while the business owner recovers.
Professional Overhead Expense (POE) insurance reimburses the disabled professional in the event they can not work. It covers ongoing operating expenses by paying a monthly benefit.
The following are some business overhead expenses that are covered by BOE insurance:
- Rent or Mortgage Payments
- Employee Salaries and Benefits
- Utility Bills
- Property Taxes
- Accounting Fees, Legal Fees, and Professional Dues
- Malpractice and Other Business Insurance Premiums
- Maintenance and Janitorial Services
- Depreciation
- Interest on Business Debts
- Office Supplies
Some policies even cover the salary of a temporary employee hired to do the duties of the disabled.
Expenses not covered by BOE or POE include:
· Income taxes
· Cost of inventory
· Cost of furniture
There are several key areas in which Business Overhead Insurance differs from personal disability insurance.
Benefit Periods
Usually, overhead expense insurance policies have shorter benefit periods such as 30 days and a benefit period of 12 to 18 months. It is intended to help keep the business afloat during a short period where the business owner can either recover or sell the business.
Maximum Disability Benefits
Overhead expense policies vary by company. Typically they allow you to purchase up to $50,000/month benefit.
Taxation
Overhead Expense insurance benefits are subject to income tax, but the premiums are tax deductible as a business expense. Therefore, it becomes a wash.
Disability Buy-Out Insurance (DBO)
A disability buy out (DBO) insurance policy enables either the remaining owners, or the business entity itself, to buy out the disabled owner’s share of the business at an agreeable price determined prior to the disability.
The Benefits of Disability Buy-Out Insurance
The price is determined and set when the insurance is purchased. Therefore, the disabled owner is guaranteed a buyer willing to pay a reasonable price for their share of the business. This can negate the need for litigation or for negotiation on the price.
The remaining owners are enabled to purchase the shares in their business without having to seek an outside investor. This ensures that they are able to continue in the normal operation of the company without having to relinquish any control. Continuity in daily operations is guaranteed and the remaining owners are provided with adequate funding to buy out the disabled partner.
The business itself would normally continue to pay the disabled partner an income, or return on their investment. This financial drain can cause serious problems for the remaining partners, especially, who will need to pick up the pace to meet the increased demands. With a buy-out policy in place, this does not have to be the case because the insurance is used to cover against this liability.
Insurance Payment Types
It is most common for a disability buy out DBO policy to offer a lump sum payment. This money is then used to complete a buy out in one installment. However, it is possible to arrange for the disabled partner to receive their payment in multiple installments, but this needs to be agreed when the policy is first placed in force.
Elimination Period
The majority of disability buy out insurance policies include an elimination period consisting of between one and two years. This period helps to limit the impact of the disability on the business, and it also allows the disabled owner time to determine whether or not they will be able to consume normal duties or whether a buy-out is the best solution for all concerned.
Buy In Disability Insurance
When an individual is invited to become a partner in a business or a professional practice (such as a physician, law or dental practice), there is typically a period of time involving the buying in. The person buying in often times gives up a percentage of income in exchange for an equity position. If the person buying into the practice becomes disabled during the buying in period, problems can develop in the completion of the buy in agreement. The new, to be partner, is not yet a partner. Therefore, a traditional buy sell plan will not work in covering this risk. A specialty plan know as Buy In Disability Insurance can fulfill the financial obligations stated in the contract, thereby safeguarding the completion of partnership.
There are common solutions for the following:
· Limits as high as $50,000
· Medical History
· Risky Avocations
· Older Ages or Age Differences Between Partners
· Difficult to Insure Occupations
· Family Owned Businesses
· International Relationships
· Reducing Benefits From Traditional Carriers
Disability Retirement Protection.
What would happen to your ability to save for retirement if you were hurt or too sick to work? Most people in this situation, with no income and increased medical bills, are forced to use their savings to meet everyday living expenses. It’s important to put a fallback plan in place to ensure that money continues to be put away for your retirement even if you become disabled.
Can you afford a 42% loss to your retirement savings?
A permanent disability could disrupt your retirement savings, as shown here. If you can’t make contributions to your retirement plan, your retirement dreams may not become reality.
Retirement Protection Disability Insurance helps you continue saving for retirement in the event of a disability. If you become disabled, the policy pays a benefit in the amount of your retirement plans monthly contribution into a special trust. The money in the trust is invested at your discretion until you reach age 65 and then distributed to help supplement your retirement income. It is not a pension plan. Rather, it is a program that provides disability income insurance to ensure your ability to make retirement plan contributions until the age of 65. The goal: to provide you with close to what you could have expected from the retirement plan if you had not become disabled.
Retirement Protection Disability Insurance Features:
- Monthly benefits up to $3,800/month
- Coverage can be added to an existing individual or group disability insurance plan to cover more of your annual income
- Non-cancelable, guaranteed renewable coverage to age 65, which means your policy cannot be changed or canceled except for non-payment of premiums
- Portable, individually-owned coverage
- Tax-free benefits (when premiums are paid by the insured with after-tax dollars; investment earnings within the Trust are taxable)
- Underwriting is usually minimal and may not even require a paramedical exam.
Key Person Disability Insurance
In many cases, the most valuable asset a business has is one or more “key employees”. While the employee may be covered by individual disability insurance and even worker’s compensation, if they were to suffer a disabling illness or injury, the business itself stands to lose significant earnings through that loss. Key-man disability insurance is designed to insure against this potential loss, for the sake of the business.
Small to Large Businesses Disability Coverage
Small businesses may rely heavily on a sole individual, without whom the business would quickly fail. However, even medium and large sized businesses rely much more on some individuals than on others. Losing these key employees can mean a huge potential loss in revenue or, worse still, it could mean the end of the business completely.
Determining the Financial Value of an Individual
Any company looking to take out a key person disability insurance policy needs to consider all of the financial impacts and cost implications of losing that employee. Consider the direct revenue that individual brings in to the company and how much it would cost to find and train a suitable replacement. Hiring a new recruit can be a lengthy process for some positions, and they will almost certainly require some time to become proficient in the new position. All of these factors need to be considered when determining the financial value of a key member of staff, partner, stakeholder, or any other individual.
Monthly or Lump Sum Payments
Companies usually have two options regarding a financial payout; monthly repayments or a single lump sum payment. Monthly repayments usually continue for a period of between 6 months and 2 years because it is assumed that a candidate can be found and adequately trained within that period. Lump sumps are calculated using this same period but the entire settlement is made upon the disability to that key member of staff.
Key Person Disability Insurance
Once a payment has been made, it is at the discretion of the company as to how the money is spent. There are usually no stipulations on whether it should be used to train an existing staff member or start a hunt to find a new one.
Business Overhead Expense (BOE) or Professional Overahed Expense (POE)
As a business owner, you are responsible to pay expenses to keep the business running. If you became too sick or injured to work, consider how you would be able to continue to pay rent, payroll, etc…
Business Overhead Expense (BOE) insurance reimburses the disabled business owner in the event they can not work. It covers the ongoing operating expenses by paying monthly benefit to keep the business afloat while the business owner recovers.
Professional Overhead Expense (POE) insurance reimburses the disabled professional in the event they can not work. It covers ongoing operating expenses by paying a monthly benefit.
The following are some business overhead expenses that are covered by BOE insurance:
- Rent or Mortgage Payments
- Employee Salaries and Benefits
- Utility Bills
- Property Taxes
- Accounting Fees, Legal Fees, and Professional Dues
- Malpractice and Other Business Insurance Premiums
- Maintenance and Janitorial Services
- Depreciation
- Interest on Business Debts
- Office Supplies
Some policies even cover the salary of a temporary employee hired to do the duties of the disabled.
Expenses not covered by BOE or POE include:
· Income taxes
· Cost of inventory
· Cost of furniture
There are several key areas in which Business Overhead Insurance differs from personal disability insurance.
Benefit Periods
Usually, overhead expense insurance policies have shorter benefit periods such as 30 days and a benefit period of 12 to 18 months. It is intended to help keep the business afloat during a short period where the business owner can either recover or sell the business.
Maximum Disability Benefits
Overhead expense policies vary by company. Typically they allow you to purchase up to $50,000/month benefit.
Taxation
Overhead Expense insurance benefits are subject to income tax, but the premiums are tax deductible as a business expense. Therefore, it becomes a wash.
Disability Buy-Out Insurance (DBO)
A disability buy out (DBO) insurance policy enables either the remaining owners, or the business entity itself, to buy out the disabled owner’s share of the business at an agreeable price determined prior to the disability.
The Benefits of Disability Buy-Out Insurance
The price is determined and set when the insurance is purchased. Therefore, the disabled owner is guaranteed a buyer willing to pay a reasonable price for their share of the business. This can negate the need for litigation or for negotiation on the price.
The remaining owners are enabled to purchase the shares in their business without having to seek an outside investor. This ensures that they are able to continue in the normal operation of the company without having to relinquish any control. Continuity in daily operations is guaranteed and the remaining owners are provided with adequate funding to buy out the disabled partner.
The business itself would normally continue to pay the disabled partner an income, or return on their investment. This financial drain can cause serious problems for the remaining partners, especially, who will need to pick up the pace to meet the increased demands. With a buy-out policy in place, this does not have to be the case because the insurance is used to cover against this liability.
Insurance Payment Types
It is most common for a disability buy out DBO policy to offer a lump sum payment. This money is then used to complete a buy out in one installment. However, it is possible to arrange for the disabled partner to receive their payment in multiple installments, but this needs to be agreed when the policy is first placed in force.
Elimination Period
The majority of disability buy out insurance policies include an elimination period consisting of between one and two years. This period helps to limit the impact of the disability on the business, and it also allows the disabled owner time to determine whether or not they will be able to consume normal duties or whether a buy-out is the best solution for all concerned.
Buy In Disability Insurance
When an individual is invited to become a partner in a business or a professional practice (such as a physician, law or dental practice), there is typically a period of time involving the buying in. The person buying in often times gives up a percentage of income in exchange for an equity position. If the person buying into the practice becomes disabled during the buying in period, problems can develop in the completion of the buy in agreement. The new, to be partner, is not yet a partner. Therefore, a traditional buy sell plan will not work in covering this risk. A specialty plan know as Buy In Disability Insurance can fulfill the financial obligations stated in the contract, thereby safeguarding the completion of partnership.
There are common solutions for the following:
· Limits as high as $50,000
· Medical History
· Risky Avocations
· Older Ages or Age Differences Between Partners
· Difficult to Insure Occupations
· Family Owned Businesses
· International Relationships
· Reducing Benefits From Traditional Carriers
Disability Retirement Protection.
What would happen to your ability to save for retirement if you were hurt or too sick to work? Most people in this situation, with no income and increased medical bills, are forced to use their savings to meet everyday living expenses. It’s important to put a fallback plan in place to ensure that money continues to be put away for your retirement even if you become disabled.
Can you afford a 42% loss to your retirement savings?
A permanent disability could disrupt your retirement savings, as shown here. If you can’t make contributions to your retirement plan, your retirement dreams may not become reality.
Retirement Protection Disability Insurance helps you continue saving for retirement in the event of a disability. If you become disabled, the policy pays a benefit in the amount of your retirement plans monthly contribution into a special trust. The money in the trust is invested at your discretion until you reach age 65 and then distributed to help supplement your retirement income. It is not a pension plan. Rather, it is a program that provides disability income insurance to ensure your ability to make retirement plan contributions until the age of 65. The goal: to provide you with close to what you could have expected from the retirement plan if you had not become disabled.
Retirement Protection Disability Insurance Features:
- Monthly benefits up to $3,800/month
- Coverage can be added to an existing individual or group disability insurance plan to cover more of your annual income
- Non-cancelable, guaranteed renewable coverage to age 65, which means your policy cannot be changed or canceled except for non-payment of premiums
- Portable, individually-owned coverage
- Tax-free benefits (when premiums are paid by the insured with after-tax dollars; investment earnings within the Trust are taxable)
- Underwriting is usually minimal and may not even require a paramedical exam.
Read More…
- Who Needs Disability Insurance?
- Are You Prepared For a Disability?
- Disability Insurance Policy Provisions
- Individual vs. Group Disability Insurance
- Disability Statistics
- Disability Shopping Tips
- Business Disability Insurance
- Available Discounts
- Insurance Companies
- Disability Insurance Process
- Disability Insurance Glossary