Business Reasons for Disability InsuranceSubmitted by JMB Financial Managers on May 24th, 2019
Self-motivated people are often the driving force in the success of a business, and nowhere more than in a small business. Frequently, just one or two talented individuals that possess education, knowledge and/or skills that other employees do not have are the biggest difference makers in the success of the operation.
In these circumstances, an auto accident, skiing mishap, or extended illness of one of these “key” persons will not only put them at financial risk, but it could also threaten the very existence of that small business, putting everyone at risk.
While solopreneurs, partnerships and LLCs are generally the most venerable, S Corporations – especially those with one or two “key persons” that drive the business – are also at significant risk. Whatever the structure of the company, the odds of a meaningful disability to one of these individuals are high enough that there is a need to protect their personal income and the financial well-being (and revenues) of the business.
Do you have an income protection strategy?
A well-crafted income protection strategy can help protect everyone that could be affected – directly or indirectly – by the unexpected and extended leave-of-absence of a key person. Such a strategy should include the following elements:
- Adequate Cash Reserves held in the business accounts
- Key Person Disability Insurance coverage for those talented individuals
- Business Overhead Insurance coverage for revenue lost due to a disability
- A Qualified Sick Pay Plan covering the business owner(s)
- A Fully Funded Buy-Sell Agreement covering the business owner(s)
Adequate cash reserves can provide for the short-term absence of a key person and any short-term loss of revenue because of it. Key person disability insurance provides paycheck protection and shelters the key employee from the financial risk of an extended absence from work. Business overhead insurance provides income to the business in a time when revenues are lost because of the disability of an employee that drives the company.
The IRS does not allow a company to pay the owner a salary while out of work due to a disability and to deduct those payments as a business expense. A formal (i.e. written) sick pay plan can cover the business owner while maximizing tax benefits for the company.
Sometimes, an accident or illness becomes a permanent form of disability, and a business owner will not be capable of producing their former results or even working at all. This is where a buy-sell agreement – with disability and life insurance backing it up – can keep a business intact under the leadership of the remaining owners or other employees, while making sure the business owner and their family have the financial resources to keep their lifestyle intact.
Prepare for life’s unexpected events.
Whether you are self-employed, have a partnership in a business, or have formed an LLC or an S Corp, there is a clear need to protect both your personal income and the revenues of your business. The guidance of knowledgeable and experienced advisors such as JMB Financial Managers is essential in preparing for the potential impact of disability on a business. Contact us to begin crafting your income protection strategy today.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.
About the Author
Jack Brkich III, is the president and founder of JMB Financial Managers. A Certified Financial Planner, Jack is a trusted advisor and resource for business owners, individuals, and families. His advice about wealth creation and preservation techniques have appeared in publications including The Los Angeles Times, NASDAQ, Investopedia, and The Wall Street Journal. To learn more visit https://www.jmbfinmgrs.com/.