Disability Insurance for Businesses

Disability insurance is designed to protect an individual's ability to earn an income. By protecting against the loss of income during periods of incapacity, disability coverage enables the insured to continue to provide for the basic necessities of life. However, the application and use of this type of coverage is not confined solely to individuals; it's also used extensively in the business world.Businesses typically use life insurance to protect themselves in the event of the death of an owner or key person of the organization. A similar concept is used with regard to the disability of an important individual. Disability benefits are used to shield the company from the financial impact of the functional loss of key company personnel, which could seriously jeopardize the organization's continued existence and profitability. Several types of disability insurance normally used by businesses are described below.

Key person disability income insurance serves the same purpose as life insurance for key business personnel: it indemnifies the business for the lost services of the key individual. The business is the owner of the policy and pays its premiums. The policy pays a monthly benefit to the business in order to cover the expenses for additional help or outside services when the essential person becomes disabled. The key person could be a partner, working stockholder, or an individual who performs a vital management function for the company, such as a sales or operations manager.

The key person's financial value to the business is determined according to the potential loss of business income which could occur because of the individual's incapacity, as well as the expense of hiring and training a replacement. This value then becomes the disability benefit amount that would be paid to the business. The benefit can be paid in a lump sum or in monthly installments. The benefit period may be from one- to two years, with an elimination period of thirty- to ninety days generally being applied.

Businesses often use a buy-sell agreement funded with life insurance to buy out the interest of a deceased owner or partner. Such agreements usually also contain a provision for the buyout of the owner's interest in the event of his or her disability. Naturally, this disability provision is funded with buy-sell disability income insurance. The business usually owns and pays the premiums for these policies.

One of the most important factors that a company must consider when implementing this type of policy is its elimination period. Once the elimination period is satisfied, benefits payments are made to the company for the purpose of buying out the interest of the disabled owner or partner. However, once the buyout process begins, it generally can't be stopped. For this reason the company does not want to buy out the disabled partner's interest too soon for fear of the possibility that a recovery from the disability would leave the individual with no job and no business interest. Therefore, elimination periods for disability buy-sell insurance normally run from one- to two years. The value - or a method of determining the value - of the partner's business interest is specified in the buy-sell agreement. This value is paid to the business following the elimination period. As with key person disability, benefits are payable in either a single lump sum or monthly installments. If the policy pays a monthly benefit, the payment period usually will not exceed five years. The company uses the proceeds of the policy to buy out the interest of the disabled person.

Business Overhead Expense (BOE) insurance is designed for the small business owner. In fact, most insurers limit their BOE policy coverage to small businesses. The purpose of BOE insurance is to pay for certain overhead expenses that continue after the business owner becomes disabled. The policy indemnifies the business (not the owner) for such expenses as rent, taxes, insurance premiums, utility bills, and employees' compensation (the owner's salary is not covered, however). By paying for these expenses when the owner is disabled, the business is given the opportunity to keep its doors open and continue to function.

The rationale behind BOE insurance is that because the small business owner is so important to the business' operation and profitability, when he or she becomes totally disabled the organization cannot help but suffer economically and could even be forced to close down. A single doctor in a private practice is a prime example of this type of situation. If the doctor became disabled and could not work in his or her profession, the business's income would almost certainly be weakened and the employees working in the office would likely eventually lose their jobs. As the income slows, however, the bills generally do not, and the employees still have to be paid. BOE coverage is designed to handle these issues.

BOE policies generally have elimination periods of fifteen- to thirty days and benefit periods of one- to two years. The average eligible overhead expenses of the business determine the policy's benefit amount. If the business owner becomes disabled, the business will receive proceeds from the policy equal to the actual overhead expenses incurred during the period of the owner's disability.

Business owners often incur loans or other financial obligations that require monthly repayment amounts. Unfortunately, the monthly payments can only be made 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, the business can purchase disability reducing term insurance. Should the owner become totally disabled, this coverage would provide a monthly benefit amount sufficient to cover the monthly financial obligation until it's paid off. The business is the owner and purchaser of the policy as well as the beneficiary, while the owner of the business is the insured party. In this coverage 'reducing term' refers to the fact that the monthly benefit amount is payable only for the remaining period of indebtedness or obligation.

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