Business Income Protection Solutions
All business owners face serious risks to the stability of their businesses and financial well-being if they, or a key employee, become too sick or hurt to work without proper protection in place.
It may seem unlikely, but, disabilities happen more often than you may think. That’s why it’s important to think about how to protect yourself and your business. Take a closer look at four concerns that can come up if you, another owner or a key employee became disabled:
1. Business Overhead Expense
Business Overhead Expense is a solution which covers the day-to-day operating expenses a smaller business incurs, should there be a loss of revenue due to a business owner’s absence because of sickness or injury.
2. Providing funds to buy-out a permanently disabled owner
Disability Buy-Sell Insurance policy protects the most common scenario which occurs where the other partners do not have the funds to buy out the disabled partner. Disability insurance with your buy-sell agreement provides the funds to allow your company to continue paying your salary or to completely buy your share of the business if your disability is permanent.
3. Key Person Coverage
Key Person Disability Insurance coverage protects a business against a loss caused by the sickness or injury of a major or sole revenue generator. These are benefits that are paid to the business, not the insured. Typically, the benefit amount is based on the annual salary of that key person, or the amount of revenue that is attributable to them. The benefit is generally paid out in a lump sum after a 365-day elimination period. Other payout options are available.
4. Succession Planning
Many business owners do not make formal plans to transfer the business to a successor in the event of retirement, disability or death of the owner. However, lack of succession planning can cause a business to fail because of the significant changes that follow these triggering events. A well-drafted and properly funded buy-sell arrangement can clarify who will own and run the business upon the owner’s death, retirement or disability. For situations where there are multiple business owners, there are several buy-sell options such as cross-purchase, entity redemption or cross-endorsement arrangements. However, in some cases there may be only one business owner and the owner may have identified one valued employee as a potential successor, as noted here.
In accordance with the terms of the buy-sell agreement, the intended successor will purchase and own a permanent life insurance policy on the owner’s life. The valued employee, who may be a family member or a key person in the business, will also be the beneficiary of the life insurance policy. The company will pay a bonus annually to the key employee in the amount of the premium payment due, to minimize the out-of-pocket expense of the arrangement. The bonus payments may be tax-deductible to the corporation when they are paid, but the payment will also be taxable to the key employee. The company may also choose to make a double bonus, which is equivalent to the premiums due plus the income tax due on the bonus.
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