Personal and business assets can be protected by evaluating all the complexities of the individual and business with proper and complete income protection planning. The first thing that needs to be accomplished is a complete analysis of the individual’s income and current assets and liabilities for both personal and business situations. Having all goals and details of any existing personal and business income protection help to begin this process.
Recently a producer was discussing a family law attorney prospect. The attorney was very interested in purchasing additional income protection and asked for recommendations and a comparison of several carriers to select the proper coverage. The producer started to compare policy provisions when the attorney interrupted and indicated he wanted carrier A. When the producer asked why the attorney wanted carrier A, the answer was short and to the point – it’s cheaper. The producer contemplated just completing the application and moving forward, but instead indicated to the attorney he believed he was making a “bad choice” selecting carrier A. In this instance, this policy would not provide adequate protection and the producer included this in his comparison to show alternatives in quality and cost.
He knew that the attorney was driving a top of the line automobile equipped with several high end safety features. Why did you purchase this automobile? The attorney answered that he wanted to protect himself and his family in case he was in an accident. The producer illustrated how the income protection policy he had recommended would provide the equivalent level of protection as his luxury automobile if he became incapable of working at his full capacity. The cost to provide this level of protection is higher, but if ever needed it would provide the quality he deserved. Recommending the highest quality coverage that the prospect can afford is the first step in income replacement and asset protection.
The attorney had group long term disability through his company, but knew very few details. The producer requested a copy of the certificate to analyze his existing coverage. The group LTD policy provided a benefit of 60 percent of income up to $10,000 per month after a 90 day elimination period. After reviewing the policy details it was learned that, just like about two thirds of all group LTD plans in force, the policy had a 24 month “own occupation” definition of total disability, followed by an “any occupation” definition. After 24 months, benefits continue only if the insured is unable to perform any occupation based on his education, training or experience. Benefits are normally paid to the Social Security Normal Retirement Age (SSNRA). The attorney was paying for this coverage with after-tax dollars and hence any benefits would be received tax-free. As he was only an employee, he went to the human resource department at his law firm to discuss the quality of coverage. The head of the department knew about this definition, but indicated that the partners decided on this coverage because of cost.
The normal process would be to provide a quality buy-up individual policy to supplement the group LTD coverage, but this producer was concerned about the group LTD plan. He also recommended that the attorney purchase specialized coverage that would provide additional benefits if the group LTD policy definition change impacted monthly benefits. This policy does not change the definition in the group LTD policy, but does supplement coverage to provide additional protection should the group LTD prove inadequate.
An expanded approach to protect assets is to add a catastrophic disability benefit to an income protection policy. This coverage will provide an additional monthly benefit if the policyholder is unable to perform at least two activities of daily living (ADLs), or has a severe cognitive impairment. ADLs include bathing, continence, dressing, eating, toileting and transferring. This additional cash can help pay for custodial care in a variety of settings such as the home, a community organization or other facility. There will also be added potential expenses such as medical care expenses, home and automotive modifications and prescription costs. Without this protection, personal assets could be decimated.
A divorce can ravage personal and business assets in the case of a disability. What happens when a spouse becomes disabled and is no longer financially able to pay their alimony or child support payments? What would a disability do to support payments and assets? What would happen to the child’s education and future opportunities? This education provision is oftentimes included in divorce decrees. There are two pieces to this puzzle and both can be protected with specialized income protection. For recipients: Ensure support payments continue. If the payor’s income has stopped due to disability, support payments could be reduced or even terminated. For payors: Prevent the need to liquidate assets. If the payor has significant assets, a judge could order these assets to be sold rather than modifying the support payments. Either the recipient or the payor can purchase this coverage, but benefits should always be paid to the recipient. Future education funds need to be put in an Education and Maintenance Trust to guarantee those funds are available for college and other educational expenses.
Asset protection for business needs requires additional protection. The business owner might have additional special needs. Protecting the business owner’s income with “the best” protection is the first priority. The second priority is to analyze business needs. Depending upon the type of organization, size and scope, it might be determined that Business Overhead Expense (BOE) insurance is required. BOE insurance provides for a reimbursement of covered ongoing business overhead expenses. This policy helps keep the business viable until the business owner either comes back to work or can perhaps sell the business as a “going concern”. Without this type of policy, the business assets would diminish and could seriously threaten the ongoing viability of the business. A sample of covered expenses include the business owner’s share of those fixed expenses such as rent, utilities, lease payments, telephone and computer payments, salaries, fees, wages, and benefit payments made on behalf of any employees.
Asset protection for a sole business owner can provide increased challenges and opportunities. In the situation of a computer consultant with no employees, the value is the sole business owner’s asset. There may or may not be any fixed assets, but there is proprietary knowledge that most likely is not transferable or even able to be sold. We can obviously protect the business owner’s income and perhaps business overhead expenses, if applicable, but can we insure the value of his business should there be a long term disability? There is a specialized coverage available to protect the value of the business in the situation where a business sale is not viable. There are a number of different occupations and industries where a business might not be saleable in the situation of a long term disability. Ask if their clients will flee to another source in case of a long term disability. If one of his clients has a computer problem, will the client wait until he gets back from a disability to fix the problem or will the client find another source? The answer is obvious.
The third priority to protect the owner’s assets is through a buy-sell policy. Most buy-sell agreements are designed and funded with life insurance only. The buy-sell agreement should also provide for a transfer of business assets in case of a long term disability. A business buy-sell agreement provides for the purchase of a business owner’s share of the business in the case that the owner becomes totally disabled and is no longer able to work in the business. This could be a wonderful marketing opportunity as the majority of the existing buy-sell agreements do not provide a provision in case of a disability. Most producers “stay away” from this because of a lack of expertise, so being an expert in this field will provide incredible opportunities. The buy-sell insurance policy provides benefit payments in the form of periodic pay, lump sum, or a combination of both. This policy provides a source of funds to help with the purchase of a totally disabled business owner’s interest under a buy-sell agreement. Cross Purchase and Entity Purchase agreements are the two most common structures for buy-sell agreements. Although most buy-sell agreements focus on the business owner being totally disabled for an extended period of time, there is the availability of coverage when the business owner is residually disabled and could be a drain on the ongoing operation of the business if the residual disability lasts an extended period of time. The buy-sell agreement can also be amended to provide for a transfer of assets in the situation of a residual disability.
Income and asset protection is not complicated if all aspects are examined and analyzed. The solutions should be appropriate and the recommendations need to be of such quality that in the case of a disability, your consultation and advice will provide a financially secure environment.
