Business Owners Have Unique Problems. Are You A Problem Solver?

    Business disability insurance is advantageous for small business owners, professionals with small practices, and employees who rely heavily on those owners. There are problems unique to this group of entrepreneurial leaders. But my question is: How often have you contacted business owners to discuss their unique problems?

    There are several important business applications for disability insurance above and beyond the replacement of the disabled owner’s income. They are most appropriate for small and medium size business owners and professionals.

    If a company needs the involvement of an owner to help produce revenue, the business needs to be protected with overhead expense (OE) insurance to reimburse the owner for the incurred business expenses in case of a disability so that the business doesn’t have to close the door. If the business has more than one owner active in the management and day-to-day operations, then it’s also necessary to have a buy/sell agreement in writing that spells out the terms of a buyout in the event of disability of an active owner.

    If there are key employees involved in the business who would be difficult or expensive to replace, the owner must consider key person disability insurance to protect the business for their lost services during disability. If a business owner incurs loans or other financial obligations that require monthly repayments, he needs disability business reducing term insurance.

    Defining the Small Business Owner
    The small or medium size business owner is anyone who has a proprietary interest in a business small enough to be significantly impacted by his involvement. This involvement could be generating revenue, such as a day-to-day operator of a retail store, or a physician. These owners have risks and exposures to disability that extend well beyond replacing personal individual income.

    Purchasing business disability insurance is a choice that all small or medium size business owners should seriously consider. Unfortunately, many owners have never been contacted by anyone about the need to purchase disability insurance.

    Several types of disability insurance products normally used by businesses are described below.

    Overhead Expense Insurance. OE insurance is designed specifically for a small or medium size business. Since the owner is so important to the operation and profitability, the business will suffer economically if he becomes totally disabled-it could even be forced to close. A good example would be a self-employed physician in private practice who becomes disabled and cannot work; just as personal expenses continue and frequently increase during a disability, so do the business expenses.

    An overhead expense policy would reimburse the owner for covered expenses such as rent, employee wages, taxes, utilities, insurance premiums, janitorial services Roanoke, dues and subscriptions, and professional fees. Failure to meet these expenses would at the very least create a backlog of debts, making it difficult to resume the business and, at worst, result in the business closing. Premium for the insurance is tax deductible as a business expense but coverage is not available for every occupation.

    Disability Buy/Sell Insurance. In any business with more than one owner, the question of the sale of a disabled owner’s interest should be addressed before the need arises. The preferred way to do this is to draft and adopt a buy/sell agreement, which gives the disabled owner the right or obligation to sell his interest in a closely held business to his partner(s). If this problem isn’t resolved with such an agreement, it almost always ends in a painful dispute over one or more of the following issues: obligation to sell an interest; price of the disabled owner’s interest; and/or management of the business. These are compelling reasons for an agreement to be executed in advance to address each of these critical areas.

    The owners should establish a value and agree to a formula while they are healthy. Valuing a business interest can cause serious problems even if all the owners agree a buy/sell agreement is necessary. Thus, the business owners should discuss and decide the valuation method with the help of their Accountants Melbourne services, or similar firms, and the insurance company’s recommended guidelines. Speaking of accountants, it is no secret that good bookkeeping can make or break a small business. Are you a small business owner from the UK? If so, you might want to take a look at some of the accounting resources over on the BrooksCity website.

    Moreover, the value of a partner’s business interest is specified in the buy/sell agreement. The value is paid after the elimination period and benefits are payable in either a single lump sum or monthly installments-or both. If the policy pays a monthly benefit, the payment period will not exceed five years. The non-disabled partner then uses the proceeds of the policy to buy out the interest of the disabled partner.

    Another important factor a business must consider when implementing a buy/sell agreement is the elimination period, and the owners must make the decision about that-again, while they are healthy. Most owners feel that one or two years is a realistic elimination period before a buyout is triggered.

    Having a long elimination period avoids conflict about the possibility of recovery. If the choice is a 24-month elimination period and one of the partners is disabled and unable to work for one year, the buy/sell policy cannot be set in motion by either the disabled partner or a healthy partner. If the disabled owner is still unable to work after two years, the buyout will take place.

    Key Person Disability Insurance. Key person disability insurance provides disability benefits payable to the owner (employer) to offset losses as a result of a key employee becoming disabled. The employee has no part in the arrangement other than as the insured. The employer is the owner of the policy and pays the premium.

    There are numerous expenses incurred by a small business when a key person is disabled. There are costs in locating, hiring and training a replacement, which obviously reduces the profits of the business. Usually, during the time when a replacement is being sought, other employees are required to handle the additional workload, which causes a backlog of work for everyone involved, as well as a decrease in efficiency and effectiveness.

    A key person policy pays a monthly benefit and/or a lump sum to the employer in order to cover the expenses for the additional help or outside services. A key person can be any employee who generally has less than 50 percent ownership and performs functions that contribute to the profitability of the business (sales or operations management). The benefit period may be from one to two years.

    Disability Business Reducing Term Insurance. Business owners often incur loans or other financing options from firms such as Hirshmark Capital that require monthly repayment amounts. However, the monthly payments can be made only as long as the business owner is well and able to run the business. In other words, as long as the owner is not disabled.

    To protect such financial obligations and the assets that might be lost in the event of default, a business owner can purchase disability business reducing term insurance. If and when the owner becomes disabled, this coverage would provide a monthly benefit amount sufficient to cover the monthly financial obligation until it is paid off. The insured is the owner and purchaser of the policy and the beneficiary is the creditor.

    For this coverage, “reducing term” refers to the fact that the monthly benefit amount is payable only for the remaining period of the loan or obligation.

    Owners of small and medium-size businesses have unique problems-problems cannot be ignored.

    Are you a problem solver?

    Insurance Designers of Kansas City

    CLU, ChFC, RHU, is marketing manager for disability insurance and long term care insurance with Insurance Designers of Kansas City. He has 37 years of professional experience in the insurance industry - the last 32 years in brokerage.Loridon is currently president of NAIFA Kansas. He has also served as president of NAIFA Johnson/Wyandotte (Kansas) and the Kansas and Michigan Associations of Health Underwriters. He is a board member of the International Disability Income Society and member of the American Association for Long-Term Care Insurance. He has been a speaker at various industry functions on disability insurance and has taught LUTCF disability insurance and continuing education courses for many years.Loridon can be reached at Insurance Designers of Kansas City, 9401 Indian Creek Parkway, Suite 150, Overland Park, KS 66210. Telephone: 800-255-0163. Fax: 913-451-3963. Email: maury@idakc.com.