Disability Insurance Can Ensure Business Continuity

The need for comprehensive risk management strategies in retirement planning cannot be overstated.

An often overlooked yet crucial component is disability insurance.

It plays an important role in safeguarding business continuity and ensuring stability, particularly when a key owner becomes incapacitated.

An owner could have a stroke, a heart attack or another health problem that interferes with the ability to work at any time. Disability can come to a client with $50 million in net worth about as easily as to a client with just $50,000.

Recent legal developments, such as the Supreme Court decision in Connelly v. IRS, which sided with the IRS, underscore the importance of strategic insurance planning to avoid unintended tax consequences.

The Role of Disability Insurance

Disability insurance provides a safety net for businesses when a key owner or partner becomes incapacitated.

It ensures that the business can continue to operate smoothly without the financial strain of compensating a non-contributing owner.

This type of insurance can also be used to buy out the disabled owner's share, thus preventing potential conflicts and ensuring business stability.

Consider a scenario where three partners own a business.

If one partner becomes disabled, the remaining partners might find themselves in a difficult position.

They would still need to pay the disabled partner their share of the profits, despite the person's inability to contribute to the business.

This can lead to financial strain and deteriorating relationships among the partners.

Disability insurance can alleviate this burden by providing the necessary funds to buy out the disabled partner, ensuring the business continues to operate efficiently.

Disability Insurance and Buy-Sell Agreements

A well-drafted buy-sell agreement is essential for any business partnership.

Including provisions for disability insurance in these agreements ensures a clear and agreed-upon process for buying out a disabled partner, minimizing the potential for disputes in the near or long term.

This not only protects the business but also secures the financial interests of the disabled partner and their family.

Disability insurance is a critical component in protecting business continuity and mitigating estate tax liabilities.

The Connelly v. IRS ruling by the Supreme Court serves as a reminder of the complexities involved in insurance planning and the need for strategic approaches.

By integrating disability insurance into their risk management strategies, business owners can safeguard their enterprises against unforeseen circumstances and ensure long-term stability.

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Jack Elder is senior vice president of advanced markets at CBS Brokerage.