Other Disability Insurance Policies
Disability Insurance for Business Owners
If you have 10 or more employees, you may be considering a group policy. Group policies typically offer a limited monthly benefit (60 percent of an employee’s income to a maximum amount).
Read more about the difference between group and individual policies by clicking here.
There are many other types of disability insurance that can keep your company and employees protected in the event of a disabling life event. Scroll down to read more or contact Set for Life Insurance today.
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 known 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
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.
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 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.
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.
Retirement Protection Disability Insurance
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.
An interesting problem develops when a termination of an employee involves a severance package and part of that package is the requirement to continue certain employee benefits such as their Long Term Disability Insurance. The human resource departments often times get these calls and panic when they realize they cannot perform as promised since they can no longer keep the terminated employee on the group LTD plan. Securing an individual plan is not available option since the person is currently unemployed.
From the firm’s perspective
This situation has now placed the firm at risk for a significant liability should the terminated employee become disabled. The firm would have to fund the disability benefits themselves and this could be into the hundreds of thousands or even millions of dollars. The firm would have to book this liability as if the benefit will be fully payable.
From the terminated employee’s perspective
While an individual is between jobs, the need for disability insurance continues to be very important. This may sound contrary to logical thinking, but consider the consequences of having a disability during unemployment. How will he continue to run his household, pay the mortgage, medical bills, etc?
To make matters worse, the disabled worker most likely now has a pre-existing medical condition which would preclude him from being able to purchase an individual policy. The medical condition or physical limitation could also cause potential employers to deny employment leaving the individual with few options.
The solution is a severance disability policy to help cover this risk.
Starting a business can be an arduous process. One of the most important steps is to secure financing. To ensure you can still pay your payments if you become disabled, some banks require a disability insurance policy to secure the loan. There are policies designed specifically for this need.
Take for example Dr. Jane Dentist. She is purchasing a dental practice for $500,000. Her loan terms require her to pay back the loan in $10,000/month increments for 7 years. She could obtain a policy designed specifically for this need. After a waiting period (typically 90 days), it would pay the bank $10,000/month for the duration of the loan. If she became disabled in the first year, it would continue to pay the rest of the loan. If she became disabled in year 6, it would pay the remaining months.
This is a separate policy from business overhead expense insurance that would pay the overhead expenses to keep the practice running.
High Limit Disability Income Insurance
The following examples demonstrate many different insurance situations that can be addressed when you work with Set for Life Insurance.
“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. 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.
Client Example of Key Person Insurance
We have a Fortune 500 client in the state of New York which is sales oriented. Its leading salesman produces $9,000,000 per annum in revenue to the company through new and existing clients, with whom he has the relationships. The company was concerned that in the event he became disabled, they would lose this revenue. They purchased a policy which pays the company up to $7,200,000 per annum in the event that this salesman becomes disabled.
Business Overhead Coverage
This is also known as Business Overhead Expense (BOE) or Professional Overhead 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… This product is often used by small companies or professionals who need to be healthy in order to cover the monthly costs of doing business. BOE or POE insurance covers the ongoing operating expenses by paying monthly benefit to keep the business afloat while the business owner or disabled professional recovers.
Overhead Expenses 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
- Interest on business debts
- Office supplies
- Salary of a temporary employee hired to do the duties of the disabled*
Expenses Not Covered by BOE or POE
- Income taxes
- Cost of inventory
- Cost of furniture
How BOE Differs from Personal Disability Insurance
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.
Overhead Expense insurance benefits are subject to income tax, but the premiums are tax deductible as a business expense. Therefore, it becomes a wash.
Client Example of BOE
We recently wrote a policy for a dentist who owns his own practice and does not want to falter on bill payments in the event of a disability. The policy covers everything from office rent and employees’ salaries to office supplies, therefore providing crucial protection for this small business owner. The same limits that are available for all other products are offered for this coverage if the company’s expenses merit it.
The purpose of this coverage is to protect a company against the loss of an employee who has guaranteed financial compensation, whether physically able to work or not.
Client Example of Contractual Obligation
A second Fortune 500 client of ours signed their Chief Executive Officer to a guaranteed contract worth $3,000,000 per annum for a five-year period. They also gave him a non-guaranteed loan equal to $10,000,000. The company purchased two policies on the CEO, the first covering 60% of his salary, the second covering 80% of its non-guaranteed loan. The coverage was structured in such a manner as to directly correlate with the company’s payments to the insured. To expand, the salary coverage began with a limit of $9,000,000 and this is the benefit that would have been paid in the event the insured suffered a career-ending disability in the first month. However, the benefit reduced by one-sixtieth for every month the insured was able to perform his occupation.
Adequate life insurance is almost always addressed for corporations’ and partnerships’ buy-sell agreements, however, the disability side is often ignored. This is due to the fact that like benefit amounts were not considered available in the disability marketplace. With our product, this is no longer the case.
Client Example of Disability Insurance for Buy/Sell Agreements
We were recently requested to effect coverage on the seven owners of an engineering firm. They had purchased life insurance of $3,000,000 each to protect their buy-sell agreements in the event of the death of one of the owners. We duplicated what was done with the life insurance by offering matching lump sum disability benefits. The policy would respond in the event one of the owners suffered a career-ending disability, giving the remaining owners the capital to buy-out the disabled partner.
Company Revenue Protection
When a company loses a contributing member, the bottom line of that company can deteriorate until that person returns or is replaced.
Client Example of Company Revenue Protection
An orthopedic surgeon’s clinic in Arizona recently requested coverage on the six practicing orthopedic surgeons who work there. Each surgeon generated between $50,000 and $90,000 a month in revenue to the clinic. All six were insured by the clinic for 80% of their monthly production. The benefit was payable for a twelve month period, since it was determined by the clinic that they would have found a replacement after one year.
Personal Income Protection
We were approached regarding the Chief Executive Officer of an oil company in Texas. The proposed insured’s annual income was $5,000,000 and the request was for our office to design adequate disability insurance with the CEO as the policy owner, insured, and beneficiary (i.e., the coverage was intended to replace the insured’s income that would be lost if he were unable to work due to disability).
The final policy was structured to have a monthly benefit of $250,000. This benefit would begin after the insured had been disabled for ninety days and would continue for up to three years. At this point in time, if it was determined that the insured would never be able to return to his occupation, he would receive an additional lump sum benefit of $5,000,000 (normally used to purchase an annuity, for a total benefit of $14,000,000). Since this insured structured his policy so that the benefits would be income tax free, this coverage protected his income satisfactorily.