Lecture Notes: Disability Income Policies and Business Overhead Expense

Introduction

• Discussion on the impact of disability on small businesses.
• Importance of key individuals (e.g., shareholder, key employee) in business operations.
• Statistics: 45-year-old males have a 40% chance of suffering a disability lasting over 90 days.
• Average duration of disability: 4.3 years.
• Implications for family income and retirement if a business principal becomes disabled.

Risks and Challenges

• Key Risks:
  • Disabling a principal or key employee affects business continuity.
  • The business as a key family asset is at risk if owners cannot perform their roles.
  • Potential loss of customers and income if a principal like a chef or pharmacist is unavailable.
• Financial Implications:
  • Disruption in family income.
  • Challenges in achieving financial planning goals due to disability.

Insurance Solutions

• Disability Income Coverage:
  • Provides financial support during temporary or long-term disability.
  • Includes specialized policies like Business Overhead Expense.

Business Overhead Expense Policy

• Purpose:
  • Keeps business operational during the principal's short-term disability.
  • Suitable for small businesses like dental practices, pharmacies, etc.
• Coverage Includes:
  • Business overheads like rent, utilities, taxes, equipment leases, internet, legal and accounting fees, loan interest, and employee salaries.
  • Monthly coverage based on actual business expenses.
  • Unused coverage can be carried forward if monthly expenses vary.

Financial Aspects

• Tax Implications:
  • Benefits paid are taxable income to the company.
  • Premiums are deductible as a business expense.

Policy Limitations

• Non-Covered Items:
  • The salary of the disabled owner or their replacement is not covered.
  • New capital expenditures and principal loan repayments are not covered.
• Replacement Strategy:
  • Replacement employees (e.g., temporary dentists) generate income to cover their salaries.
  • Disabled owners need an individual policy for their income replacement.

Conclusion

• Importance of having appropriate disability coverage to manage business risks.
• Business overhead policies are crucial for maintaining operations during unforeseen disabilities of key personnel.