While many business owners plan for the survival of their businesses in the event of death, many don’t consider the effects of disability on the firm’s future. Or, like many of us, they just don’t believe they will ever become disabled. However, the probability of a disability is significantly higher than death:
2,650 – The number of people disabled each hour due to an accident, compared to 13 who die from an accident.1
43 – The percentage of people age 40 who will have a long-term disability event prior to age 65.2
Two types of coverage can help:
- Disability buy-out insurance provides funds for the purchase of a disabled business owner’s interest in the event of a long-term, total disability.
- Overhead expense insurance covers operating expenses of a business when the owner can no longer generate revenue due to disability.
The two products work nicely in tandem. Overhead expense fills the gap immediately following the onset of disability to keep the doors open. If the disability becomes long term and a buy-sell agreement is in place, disability buy-out insurance can fund this obligation.
Disability buy-out and overhead expense offer many benefits. In the case of overhead expense, the coverage removes doubt about the company’s ability to continue to pay fixed, ongoing expenses in the absence of a disabled owner. Disability buy-out insurance provides the following advantages:
- Maintains business continuity and credibility, which are concerns of customers, creditors and employees
- Assures that the disabled owner and his/her family will not have to manage the business in the event of total disability
- Assures that the active partner(s) retain control of the business
- Assures the disabled owner that his/her financial future is not contingent on the strength of the business
- Provides funds needed to pay medical bills and living costs
There are several ways to fund a buy-sell agreement, but none that provide the advantages, security and affordability of disability buy-out. One option commonly practiced by small businesses is to reinvest profits into the business after taking out enough to live on.
At times, these businesses must rely on cash flow to pay for expansion and development, or must borrow money against the business. However, in an unforeseen situation like a disability, there is no guarantee that the money will be there to pay for a partner’s interest in the business.
Another option is to take out a loan from a financial institution. Unfortunately, loans are difficult to come by in this situation. The business may not be considered a good credit risk when a key contributor is disabled. Disability buy-out, however, provides guaranteed cash flow when needed – and usually is much more affordable than the alternatives.
What should you do?
- Review your buy-sell agreement to make sure it has appropriate disability provisions.
- Consider your sources of capital to fund business overhead and a disability buyout.
- Consult our Firm to assist you in reviewing your current plan or creating and implementing the best plan for you.
1 National Safety Council Injury Facts, 2006
2 JHA Disability Fact Book, 2006
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