Managing Risk and Protecting Wealth

by Maury Loridon

America encourages entrepreneurs. The American brand of free enterprise fosters a spirit of “ownership” unparalleled elsewhere in the world. The small business owner creates nurtures, encourages, supports, and lives the business out of a need to win and guide the destiny of his or her career.

There is a great risk involved, and it extends beyond the commitment of dollars and cents. There is a risk of falling flat on one’s face. And, as it should be with any investment, the reward should be commensurate with the risk. Minimizing risk is a business owner’s challenge and responsibility.

In most small businesses, the owner is key to the company/practice’s success. Subtract him or her from the equation and declining revenue is almost inevitable. Declining expenses, however, aren’t.

Business disability insurance is a critical risk management/wealth protection tool for the small business owner, the professional with a small practice, or the employees who rely heavily on the owners. There are several important reasons for business disability insurance above and beyond the replacement of a disabled worker’s income. If a business needs the involvement of a business owner to help produce revenue, the business needs to be protected with Disability Overhead Expense (DOE) insurance. The DOE policy can be designed around the business’ cash flow and the reserves. If the business has more than one owner active in management and day-to-day operations, it will be necessary to adopt a buy-and-sell agreement in writing that spells out the term of a buyout in the event of death, disability, retirement, or termination of an active owner.

Just as with death, the long-term disability of

a business owner or partner can create significant hardships for a business. Where there is no planning, the bargaining positions of the parties involved are not equal. A disability can turn an asset into a liability. It is difficult to determine exactly what steps should be taken when the length of the disability is unknown. Given the person’s past activity, proprietary interests, and the need for income, the owner or partner is entitled to receive his/her full salary during a time of disability.

As the chances for a successful recovery dwindle, however, the financial drain on the business may lead to an emergency situation.

DOE insurance pays the business’ expenses when the owner is disabled and unable to work in the business. Just as personal expenses continue and frequently increase during a physical disability, so do a business’ expenses. The following are expenses covered by DOE policy: Rent; electricity; telephone; heat; water; laundry; janitorial; certain employee salaries; real estate taxes; interest on debt; depreciation or scheduled installment payments of principal of debt; rent or lease expense of furniture; equipment or other assets used in the business; and such other fixed expenses as are normal, necessary and customary in the conduct of the business.

Disability Buy-Out insurance is designed to work with a business buy/sell agreement. It funds all or part of any buy-out due to total disability provided for in the buy/sell agreement, and the policy itself can be owned by the business or the individual business owner.

Business owners almost always have loans. But what if an owner is injured or too sick to work? Business Reducing Term insurance insures against a disability preventing the owner from meeting such fixed payment obligations as: Salary contract guarantees, contract performance guarantees, the funding of medium term loans dependent upon the business talent of a key individual for their repayment, and purchase agreement.

There are many things that may happen that may threaten the business an entrepreneur or professional has created and nurtured. The inability of the owner to work because of an accident or sickness will jeopardize the future of almost any business. Thankfully there are insurance products designed specifically to manage those risks.

 

Maury Loridon, CLU,ChFC,RHU is Vice President of Brokerage, TFB Brokerage Services, LLC.
P     |    913.648.5526
E     |    maury@taxfavoredbenefits.com