Disability Belongs In
Small Business Plans
While small business owners have faith that their financial advisors cover all their business insurance needs, the fact is that many planners overlook a very significant aspect of their clients insurance plan–disability coverage.
“The area of life insurance planning is thoroughly done, and so is the area of retirement planning and college planning,” says Lawrence Halperin, president of Halperin & Co., Warwick, R.I. “But one of the weakest areas is disability planning.”
There are two areas of disability planning that financial advisors usually overlook, says Michael J. Eskra, president and CEO of Eskra and Associates Inc., Coral Gables, Fla. The first is overhead expense coverage and the second is coverage for a disability buy-out.
Even in those instances where business owners do some disability planning, the overhead expense coverage is often neglected. For example, Eskra continues, if a dentist or other professional becomes disabled and only has disability coverage of $5,000 a month and it costs $5,000 a month to keep his office open, he faces a dilemma. “Does he keep his office open and not feed his family, or does he feed his family and close his office down?” he asks.
This is an area in which James Connell says small business owner clients are showing more interest. Back in the 90s, when business was great and the stock market was up, business owners really werent concerned with the risk of disability, says Connell, who is with James Connell Associates, Camillus, N.Y. But now that the economy has slowed and there is an increased emphasis on cash flow, businesses are looking at their disability coverage.
“Most people are looking at whos going to pay their salary when theyre out,” he says. “Theyre looking at salary continuation plans as well as how to provide some money for someone else to come in and take over when theyre out.”
This disability need usually can be met through the use of a corporate-owned disability policy. When planning for salary continuation, it is important to have a written document stating the terms of salary payments upon disability. Otherwise, Connell explains, the IRS will look at the payments as dividendsthe upshot being that the company will not receive a deduction for the salary expense and the business owner will have to pay income taxes.
This can be taken care of with a simple agreement that states what will be paid to the business owner/employee in the event of disability, he says.
This may seem like a simple solution, but “nobody does this,” says Halperin. “Its a lack of planning.”
This situation is further complicated when there are multiple business owners. “If you have two partners that are working together and both efforts are needed to keep the business goingif you lose one, youve lost his efforts to continue the business,” says Halperin.
“Not only do you have to replace his income, but youve got to replace that person,” he adds.
Halperin illustrates the importance of disability planning for business owners by describing some actual cases hes been working on. One recent case involved a small business with two owners. The owners were in-laws, appeared to be very healthy and were in their late 30s. Halperin met with them several times and finally they agreed to cover the risk of disability.
One of the owners was having minor surgery, when he suffered a stroke. “The other owner was related to his partners wife; do you think hes not going to continue her husbands paycheck? The disability did–it saved the day,” he says.
Addressing salary continuation in the event of disability is something that business owners are open to discussing, says Connell. “But not necessarily funding the more permanent type of disability, which would end up in a buy-out,” he says.