What business owners need to know about Disability Income

May 24, 2016


If you became totally disabled, what’s your plan?

What would be the financial impact on your business, your family, if you became disabled due to illness or accident and could not work?

 Could your business afford to pay your salary if you were unable to work?

What would that do to the cash flow of the business?

My business owner clients are constantly on the move. In addition to running successful businesses, they have busy personal lives that keep their calendars full. But in between all of that, there’s the planning; plans for growth, vacations, expanding, making more money, paying for kids’ college, etc. We plan based on our dreams. When life throws the proverbial curveball (an illness, that car accident), what happens to our plans then?

If there are other owners, would paying a salary to a disabled owner cause conflict? How do they deal with the disabled owner’s family should they be interested in filling the role? Will creditors come calling? How does this affect the future credit issues?

Disability buy-out insurance can answer these questions with a tax-free buy-out benefit. The funds are available right away, and they can meet ongoing needs. The remaining owners do not have interrupt business, can keep the day to day flowing and not have to deal with any unwanted management changes (the disabled’s family members might fall in this category).

You can fund a disability buy-out plan in the following ways:

  • Fork over the cash – The business or owners use accumulated cash to buy the disabled owner’s interest. However, having the right amount in the time needed is very difficult and takes years to save. Not to mention, if there are any earnings tax complications.

  • Pay it out over time – The business or owners could pay installments over time. But this could be a drain on income for years.

  • Get a loan – If the business can even get a loan after an owner’s disability is one thing. The loan still has to be paid back with future business income PLUS interest.

  • Ta Da, Insurance – Disability buy-out insurance guarantees the funds needed.

In a disability buy-out insurance agreement each partner is the owner and beneficiary and pays nondeductible premiums for the insurance amount equal to that partner’s share of the purchase price. If disability occurs, each remaining partner receives the buy-out benefit tax-free. They then use this benefit to purchase the disabled partner’s interest as it pertains to the buy-sell agreement.

The consequences of not having a proper plan should a total disability occur are real. But there is a solution. May is Disability Income Protection Awareness Month. Regardless of the month, this should be high on the list of priorities when talking to your trusted life insurance agent. Make sure you get the most you can get, you are working with an agent who understands the product, and knows how it fits into your business planning. Disability insurance as a buy-sell funding tool can be a simple, affordable and tax-efficient solution to what could be a devastating problem.

Topics: Risk Management

Andrea Ames

A&D Advisors, LLC

Andrea has served as a financial services professional for the past three years and joined her father, Don Ames, a successful financial advisor, to launch A&D Advisors, LLC in June 2013. Andrea's role at A&D Advisors is working with successful business owners to preserve their assets and protect their legacies; using advanced life insurance planning, disability income protection planning and long-term care planning. She currently serves on the Board of Directors for NAIFA Austin, and serves as the Young Advisors Team (YAT) Chair. Andrea was recently accepted to the Leadership in Life Institute with NAIFA Texas.
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