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.
Failure to plan for a disability buy-out can result in “an absolute nightmare,” says Eskra. He has seen this “nightmare” situation a number of times. A planner will develop a buy-sell plan for two business owners and fund the buy-out with life insurance. The buy-sell agreement is usually written to say “death or disability of one of the owners.” As a result, “if one of the owners becomes disabled, they now have an enforceable buy-sell agreement and theres no funding for it,” he says.
Keeping the business running, while providing income for the owner, and capital to transition the business is a key need that all business owners have when faced with the prospect of total disability. When a plan is in place, all these concerns are addressed, adds Halperin.
When working with one of his clients, a surgeon, Halperin uncovered a significant need for disability coverage. “Here was a doctor making $300,000 a year with very little in the area of disability and disability overhead,” he says.
Halperin urged the doctor to purchase the maximum benefit available. After paying premiums for four years, the doctor was diagnosed with multiple sclerosis. Eighteen months later, he filed a claim for total disability. “He had enough disability insurance to cover all of his expenses, his childrens education, his office continued to operate, and he was able to find a young doctor to come in and take over the practice,” Halperin says.
“Doctors are usually very receptive to disability coverage,” adds James Jacobs, Jacobs Financial Group, Chesterfield, Va.
Jacobs explains one situation he had with a client, a pediatrician who was in great health. “He didnt see any reason to buy disability insurance, but I convinced him that he should,” he says.
Several years later, the doctor was diagnosed with liver cancer. “He went out on permanent disability and never recovered. We started paying benefits and he expressed to me on several occasions that this was the greatest insurance he had ever seen,” he says.
Jacobs notes that his client passed away exactly 12 months to the day he started receiving benefits. At that time, his family had just received another check from the insurance company. They contacted Jacobs to see if they had to return the check. Fortunately for them, Jacobs says, the policy contained a spousal transition benefit. “The policy had a special provision in it that said if you received benefits for 12 months, when you died your spouse would get benefits for another six months,” he says.
Furthermore, while Jacobs client was receiving disability payments, Jacobs was able to put him in contact with some of his other clients who were pediatricians. “We put the whole deal together and sold the practice,” he says.
In an industry that can tell countless success stories of the benefits of disability protection, why do many agents continue to overlook this area of planning? “It might be a training issue,” notes Halperin.
There have been a lot of changes in the disability insurance industry, he says, and perhaps there isnt enough emphasis from the agency level to focus on this area. “I dont know if they want to get involved enough in it to study all the products,” says Halperin.
Agents looking to address the disability planning issues for their clients need to learn more about the products available and need to get more training, he says.
“The education of a planner is important, and when you see enough of these claims you understand how important disability really is,” Halperin says.
Disability insurance is not a product business owners go out and buy, he continues, its sold by professionals who illustrate the need for the coverage. “You have to illustrate the need,” he says. “If you dont, then theres no need to create the solution.”
Even for those planners who do not want to expand their practice into the disability market, “it behooves you to mention these other areas, even if you dont offer it and you dont cover it, you should talk about it,” he says.
Reproduced from National Underwriter Life & Health/Financial Services Edition, September 15, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.