As a business owner, have you ever thought of someday driving to work and being involved in a near fatal car crash which sends you to the Emergency Room where you need immediate surgery and the Doctor says you will be out of work for up to a full year? Or worse yet, your routine physical exam turns out to be a diagnosis for a severe disease which could keep you out of work for over a year? Well, life does happen. Have you ever thought of how your business would handle you being out of work for a long period? Would your company be able to provide an income for you and your family without you performing any material duties for the growth of your business. The situation could be even worse if you were a one-person operation. How long could the company remain open? Would you be able to hire a temporary worker? These events are normally not considered but need be when establishing a Business Succession Plan. In other words, what happens to my company in the event I or my partners could not work for an extended period of time? These questions, while dreadful, must be answered.
We have just discussed three government programs; workers compensation, NY State Disability and Social Security. Your fourth option is a personal income protection plan. It’s often difficult to address this issue because we never think about it. However, glance at this table from a 2005 study.
Age Chances of one Person Disabled
30 54%
40 45%
50 33%
So if you are now starting to consider the need to protect your income, there are a few main points you need to know. Let me itemize the key points you should be aware of.
1. Amount of Monthly Income: Since the monies you receive are tax-free, the maximum amount an individual receives is usually 66% of your monthly earnings. This would be considered your NET, after-tax monthly earnings.
2. Waiting Period: This is the length of time before your disability plan begins making payments. The most common period is 90 Days. The concept to keep in mind is that the shorter the waiting period, the more expensive your plan becomes. This is like a deductible on your car insurance plan.
3. Type of Plan: Here you want to look for a Guaranteed Renewal, NON-CANCELLABLE Plan. This means that the company cannot cancel your coverage unless you of course do not pay the premiums.
4. Definition of Disability: The important or key word you want to look for is being unable to perform the material duties of YOUR OWN OCCUPATION. You do not want the company to say, “Well you can’t perform your position at the bank but I hear that McDonalds is hiring people to cook.”
5. Benefit Period: For a Long Term Income Protection Plan (disability insurance), the time you collect income payments is generally stated in term of years. One never knows if an accident and/or sickness will result in a permanent disability so often a Period to Age 65 is chosen. However, on average, disabilities last two and one- half to three years. Thus the insured will select a 2 or 5 Year period.
Next we’ll discuss some taxation issues and some pretty neat bells and whistles you can add to your plan. Stay tuned because we will be describing some key components you want to add to your Business Succession plan when factoring in a disability.