This is the seventh article in an eight-part series, discussing disability income insurance. The rest of the series, along with other articles by Mr. Schneider can be found here.
Now that you have provided your client with a disability income insurance (IDI) policy, which takes care of his or her personal needs (food, rent and the like), what other policies can also be provided in the event they get disabled and as a result cannot work? What if there are business expenses to be paid? What if the business has a partner and the disabled partner wants to be bought out? What if there is a non-owner "rainmaker" in the company and that person becomes disabled?
You, as an agent or financial planner, should stress to your client that only having IDI isn't enough; the client should also be concerned about keeping the business doors open and paying employee's salaries while disabled as well as having the funds for a buy-out.
Fortunately, there are policies specifically designed to remedy each of the aforementioned (and other) problems:
Business overhead expense: This policy will reimburse all covered expenses that are incurred as a result of a covered disability.
This policy, like the IDI policy, has an elimination period and typically has a choice of three benefit periods (12, 18 or 24 months), and has a tax-deductible premium (IRC-55-264). Benefits are taxable (IRC-55-264), but when the expense is paid, it becomes a tax deduction (IRC-162) and so there is a wipe.
Key-man: This policy, when taken out on a key-person (rain-maker), will provide a tax-free benefit (IRC-104 (a)(3)) to the business, in order to offset lost profits, or to pay the disabled person while also paying the possible replacement. The premium is NOT a tax deduction (IRC-205).
Buy-sell: This policy provides a benefit amount available to the non-disabled partner, so that according to the terms of the buy-sell agreement, the disabled partner MUST relinquish ownership of their shares. Typically the elimination period is no less that 12 months (hey, you don't want to kick out your partner for just a broken leg do you?) and benefits either be had on a lump-sum basis, or a monthly payout (lower premium).The premiums are NOT tax-deductible (IRC-213,265); however benefits paid are tax-free (IRC-104(a)(3)).Legal counsel should always be sought.
