Most business owners, doctors, and other high-earners have life insurance to protect survivors against the financial impact of their premature deaths. They also insure their homes, cars, and other personal possessions against financial loss resulting from fire, theft, or damage. However, many of you may overlook insuring your two most valuable assets: 1) your ability to earn an income, and 2) covering business overhead expenses.
If you are like most high earners, your family relies on your income to assure them of a comfortable lifestyle. In addition, a temporary or permanent disability could result in serious complications for your business, especially if your skills and services are necessary to its operation. When planning disability income protection, you should consider not only a personal disability income policy, but also key person disability insurance and overhead insurance.
Personal Disability Coverage
Determining whether you need an individually owned policy depends on the extent of your liquid assets, your spouse’s income, and other sources of disability income (group coverage, workers compensation, salary continuation plans, qualified retirement plans, Individual Retirement Accounts (IRAs), and Social Security and veteran benefits). If your combined resources would provide less than 60% to 70% of your monthly expenses, including taxes and savings, you may require additional disability income insurance coverage.
Depending on your income, the maximum coverage you can buy will replace 45% to 75% of your pre-disability earnings. The higher your income, the lower the percentage of replacement benefit. Cost depends on the risk level of your occupation, your age, your health, and the comprehensiveness of coverage.
It should also be noted that when you pay the premiums yourself (with after-tax dollars), the income benefits from personal disability income policies are tax free.
Key Person Disability Insurance
If your business also relies heavily on the efforts of employees who are particularly vital to your company, key person disability insurance may be a necessity for you. It can indemnify your business against the loss of the key employee’s services and provide funds for any or all of the following:
1. Finding, recruiting, training, and retaining a suitable replacement for you or the key employee(s).
2. Maintaining the credit standing of your business.
3. Ensuring stable continuity of your business.
4. Maintaining working capital.
5. Cushioning mistakes anticipated to be made by your—or the key employee’s—replacement.
6. Developing new products to overcome losses.
7. Purchasing new equipment, machinery, and technology to sustain productivity.
8. Redeeming your stock, if necessary.
9. Maintaining deposits to your established deferred compensation plan.
This type of disability coverage is especially important for a service-oriented business where income is directly dependent on your personal efforts. It can aid in maintaining the rent or mortgage obligations, employee salaries, utilities, and insurance premiums. You should study the following points of any overhead insurance plan:
1. Coverage Limitations may reduce the amount of monthly expenses covered, as well as define exclusions of variable costs (e.g., goods and services) and key person replacement salary.
2. The Waiting Period may be as short as 30 days or as long as 90 days, and will affect premiums.
3. Duration of Coverage will be limited to a stated period and is not designed for long-term overhead obligations.
Now may be the time to pay close attention to how much disability income insurance you should have in place and balance that need against what your business can afford to pay.
Let's say you have considered all of this and you say "Disability Insurance sounds like a must". Be mindful to shop different policies and review the differences in coverages offered. Are there special terms and conditions that differ from carrier to carrier? Our team at Guidance Point believes that we should NOT be the ones to sell you this insurance. Why? We think as soon as we start selling products (including insurance and annuities), our status of Fiduciaries for our clients become in jeopardy as we become concerned over our pay from products and not clients. If our clients need help shopping for this, we'd be happy to assist but we believe its imperative that we don't put our clients' best interests at risk by engaging in product sales.
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