Disability Insurance Purpose: Protects the income of an individual during prolonged disability.
Business Impact: Business income may also need protection if interrupted due to an employee's disability.
Business Risks
Key employees are critical to small business success.
Disability, death, or critical illness of key employees can:
Impair business income.
Decline productivity.
Cause sales downturns.
Result in recruiting and training costs for replacements.
Key Person Disability Insurance
Purpose: Protects the business against potential income losses due to key employee disability.
Ownership and Beneficiary: Owned by the business; business is the beneficiary.
Individual Coverage: Key employees need their own personal disability insurance.
Policy Features
Life Insured: Must be a full-time employee.
Occupation Definition: Regular occupation, not specific own occupation.
Riders:
Waiver of Premium: Applicable for unincorporated businesses.
Recurring Disability: Can be added to the program.
Coverage and Premiums
Coverage Limit:
Limited to 100% of key person’s salary.
Maximum up to $15,000 per month.
Waiting Period: 30 to 90 days.
Benefit Period: Up to 12 months (typically not longer to encourage replacement of the disabled employee if needed).
Tax Implications:
Premiums are not tax-deductible for the business.
Benefits received are tax-free due to non-deductibility of premiums.
Conclusion
Key Person Disability Insurance is crucial for safeguarding business financial stability in the event of a key employee's disability.
Reference: Table 5.1 in the textbook for a summary of business risks and insurance solutions.
Additional Notes
Lecture re-emphasized the importance of understanding risks and the available insurance solutions to mitigate the potential financial impact on businesses.