Individual disability insurance is an essential, but sometimes underrated, benefit that should be a key consideration for business owners and key executives.
INCOME PROTECTION
The ability to earn an income can be an individual’s most valuable asset. However, most people under- estimate the impact a long-term disability can have on their lifestyle, their financial plans, and their retirement goals. Although most working adults believe the odds of disability are one in 100, according to the U.S. Social Security Administration, a 20-year-old entering the workforce today has a one-in-four chance of becoming disabled before they retire.1
Income protection, also known as individual disability income insurance (IDI), can be used to address the risk of disability to an individual’s personal planning or a business’s success by protecting the incomes of key employees and owners.
Less than 10% of disabilities are caused by accidents. The majority of disabilities result from common conditions related to one’s back, joints, heart, the circulatory and nervous systems, and cancer.
Many business owners purchase life insurance to address the impact of death on their operating expenses and business continuity, but often have not considered protecting the risk of disability. Insurance solutions are available to address the risk of disability on the business to provide benefits for salary continuation, overhead expenses, or funding the buy-out of a disabled owner or partner.
Chances Out of 1,000 that At Least One Long-Term* Disability Will Occur Before Age 652
BUSINESS DISABILITY INSURANCE (DI) SOLUTIONS
KEY PERSON, BUY-OUT, OVERHEAD EXPENSE
Owners want their business to continue without interruption. When an owner or partner is unable to contribute to the company due to an accident or illness, there are several ways a business can be protected against loss.
BUY-OUT DI
Every co-owned business should have a buy-sell agreement in place to govern the buy-out of an owner’s or partner’s interest in the business, no matter the reason. The agreement should outline the events that trigger the available interest, who can purchase the interest and when, and the fair purchase price of that interest.
Life insurance planning is often used to ensure that if an owner or partner dies, the money is available to purchase the deceased’s interest in the business. But what happens if a principal has a prolonged or permanent disability? It is also important to consider a funding mechanism if a disability occurs.
One-in-three 45-year-olds has a 79% chance of disability for longer than 90 days before reaching age 65.
Risk of Death and Disability from Age 20 Until Retirement
Disability buy-out insurance provides funding to purchase a totally disabled business owner’s interest under a buy-sell agreement. Funding for the buy-out transaction is provided in a timely manner and without placing the business at risk by having to obtain loans, reduce profit, or draw from the company’s cash flow. There are several types of payout options to fund the agreement including monthly installments, a lump-sum payment, or a combination of both a lump-sum payment and monthly installments.
KEY PERSON REPLACEMENT DI
Many business owners and salespeople are key revenue drivers for a business. What happens if a key person is no longer able to work due to an illness or accident?3 Despite the probability of disability being much higher during working years, many businesses have not addressed the risk of a key person experienc- ing a disability in their business planning. Key person disability policies can help the business when it is identifying a replacement and when the successor is ramping up sales to support the business.
BUSINESS OVERHEAD EXPENSE (BOE) DI
If a business owner is unable to work due to a disabil- ity, it can become difficult to pay ongoing business expenses. BOE DI insurance provides reimbursement to the business of a disabled owner for their share of certain fixed operating overhead expenses. Covered expenses include employee wages, payroll taxes, rent, property taxes, office expenses such as utilities and equipment, accounting fees, insurance premiums for employees, and more. Some expenses such as personal taxes, travel, parking, and entertainment are excluded. Policies typically provide benefits for 12–24 months to give the business owner enough time to recover. If recovery is not possible, other arrangements for the business can be made. Business loan protection may also be available to cover business-related loan obligations.
HOLISTIC RISK PLANNING
There are many risks that business owners face, but the financial impacts to a business as the result of a death or disability can be mitigated with insurance. Successful businesses grow revenue and valuations over time. As a result, it is prudent to periodically review business agreements and insurance coverage to maintain proper benefit levels to keep the business operational if an unexpected event occurs.
This piece was created by M Financial’s Product experts and produced by the marketing team.
- Social Security Administration, Fact Sheet 2023, https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf ↩︎
- Source: Disability Fact Book, GenRe, Seventh Edition, 2013–2014 ↩︎
- Social Security Administration, Actuarial Note, Number 2022.6, Disability and Death Probability Tables for Insured Workers Who Attain Age 20 in 2022, December 2022. ↩︎