What if something happened to you, as a business owner, and you couldn’t work in your own business for an extended period or never again? What would happen to you, your family, your employees, and their families? What would happen to your business if it was a key employee that wasn’t able to work? These are important questions to ask, and it is critical to do the proper preparations for meeting these needs and to protect your business from losing its value. One of these risks is the possibility of the Business Owner becoming ill or hurt, and not being able to work.
How high is the risk of disability?
Statistics show that there is a 40% chance of a 45-year-old male, suffering a disability lasting longer than 90 days prior to age 65. On average, a disability lasts 3.2 years. When there are two owners of the same business, both age 45, the likelihood of one of them becoming disabled for 90 days or longer goes up to 62.5%. This shows that Business Owners shouldn’t think that it won’t happen to them. Unfortunately, many Business Owners, Accountants, Lawyers, and Insurance Advisors don’t pay sufficient attention to the possibility of the shareholder becoming disabled.
What could happen if I don’t have disability insurance?
Not having the right disability insurance could mean that the Business Owner and his/her family won’t have enough income for their daily needs. It could also mean the business will quickly decline, not able to pay the business owner, pay employees, pay the rent, make loan payments, pay income tax installments, and potentially lose suppliers, making it very difficult to get the business back on its feet once the disability is overcome. It could mean that the Owner’s investments could quickly decline in value.
What could disability insurance do for business owners and their businesses when needed?
There are various types of disability insurance policies that business owners should consider. This includes personal disability insurance and business overhead disability insurance. Note that some riders (see later in this article) may need to be added to meet some of these needs. The things that various disability policies can do for Business Owners are:
- pay a portion of the owner’s income
- cover overhead expenses like rent, property tax, utilities, vehicle leases, salaries of most employees, loan interest, lawyer, and accountant fees
- cover the inability to sell the business by effectively paying the owner the value of the business
- periodic or lump-sum payment of a portion of a business loan
- proceeds to fund a business buyout, funding a shareholder agreement
- pay “stay bonuses” to employees so they won’t leave while still needed
- cover recruiting costs for key employees who are not coming back
- fund emergency expenses that may occur
Shareholder Agreements
When there is more than one shareholder in the company, it is important to have a shareholder agreement or a Buy / Sell Agreement. Unfortunately, many shareholder agreements don’t consider the possibility of one of the shareholders becoming disabled. Within this agreement, it is imperative that it consider the possibility of one of the shareholders becoming disabled and having disability insurance to fund the actions laid out in this agreement. Some points to consider in this agreement are:
- It is critically important that the agreement contains a clear definition of what constitutes a “disability” when shares of a disabled shareholder may (or must) be sold under the agreement.
- The definition of “disabled” should include both mental and physical incapacity to perform his or her normal duties within the business.
- There should be a defined waiting period of at least a year before enacting the sale of shares held by the disabled shareholder so it can be determined if the disability is long-term or permanent.
- If the insurance proceeds aren’t enough to pay for the full value of the shares, the agreement’s remaining amount is to be paid over a period of time – typically 5 years.
- Whether the disability insurance policies are owned by the shareholders individually, by the corporation, or by a trust. The tax implications of each should be considered.
Possible Added Features ( and Riders )
Some potential features/riders you may be added, depending on the type of business you have, on disability insurance policies include:
- Premiums will be waived if total disability continues for three consecutive months
- If there is a recurrence of disability within three months of returning to work, it will be considered a continuation of the first disability period, and no waiting period is required
- If the business owner dies while receiving benefits, the beneficiaries or estate will receive an amount equal to eligible expenses incurred in the three months following the death.
- The ability to increase coverage as the business grows without having to answer additional health questions.
- In some cases, it is possible to get a Return of Premium rider on the policy that will refund a portion of the premiums paid after a number of years if you don’t make any claims on the policy.
Getting the Help Needed
There are many different potential sources of disability payments. These include CPP, EI, Worker’s Compensation, Group Plans, plus plans that specifically cover the areas mentioned above. The challenge for insurance advisors is to co-ordinate all these plans to ensure that:
- There are no gaps in coverage protecting the client or the client’s business
- There is no needless, and expensive, duplication in coverage
This why it is important to have an insurance agent that has a strong understanding of business and finance providing you with the products and services to Business Owners.
Remember, the longer Business Owners wait to put in place a plan to protect themselves, their business, their family, their employees, and their employees’ families, the more costly will be the solutions and the higher the risk that the Business Owner won’t be eligible for the coverage needed.
By Kevin Ballantyne, BBA, CBEC, CPA, CA
Financial Associate
Experior Financial Group