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Disability Buy Out
Business Disability Insurance
 

  You and your partners have invested heavily in time, money and hard work to build your business. You've insured its physical plant, probably your lives and your families' lifestyles with individual DI. Doesn't it make sense to take the next step and ensure that your business can go on even if one of you can't?

imagine how difficult running your business would become if one day one of the major players in your business was no longer able to come to work because of a sickness or an injury.

Anyone who owns a business or professional practice knows how important even crucial each key person's contribution is, every day. Even an extended vacation or a pressing personal problem can interfere significantly with the day-to-day operations of a small company.


But of course a disability has a much more serious impact
than a short absence from the office. In fact, an unforeseen disability has the potential to complicate your business's financial picture even more than a death or a retirement, two events more commonly planned for.


First, since no one can predict whether the disabled person
will be able to return to work-or when-it is almost impossible to initiate a simple buy-out, the obvious solution at death or retirement. Plus, since the person is still alive and not eligible to begin collecting retirement funds, he or she needs money. The disabled owner may want to recover the capital invested in the business as well as replace the income lost due to the disability.


The whole situation can generate any number of difficult
issues on top of the disability itself, especially in a small, tightly knit business with only a few employees. However, there is a workable solution that can help prevent conflicts and balance everyone's best interests a disability buy-out agreement.

How Likely Is It That One of You May Become Disabled?


When you're immersed in the day-to-day details of creating
and running a small company, you may not think much about the possibility of becoming disabled. You're too busy trying to build your business! However, the truth is that disability is a very real possibility. A car accident, a serious illness, a heart attack even a back injury can keep you away from work for quite a long time.


Unfortunately, you are not immune from illness or injury
simply because you are vital to the success of a particular business. Consider the statistics on the subject, which tell us that in a multi-owner business, the chances of an owner's becoming disabled for 90 days or more before age 65 are startlingly high:

• With two owners, both aged 35, there is a 34% chance that one will become disabled prior to age 65*

• With three owners, all aged 35, there is a 47% chance that one will become disabled*

• Of all 45-year-olds disabled for one year, after five more years:

- 19.9% will have died

- 57.5% will still be disabled**

Resolving Conflicting Interests


each major party in the business has his or her own unique set of interests and, in fairness, all these conflicting points of view must be taken into consideration. Obviously then, without a well constructed agreement, the crisis of a key player's disability could force an otherwise successful business into dissolution.

The Remaining Owner's Point of View...


If another owner's disability were to persist for a year or even longer, you might begin to ask yourself these questions:

How long can we afford to operate without our partner's help?

When should we begin to think about hiring a replacement?

• What happens now to the business loans the bank made us both sign for personally?

• Will our creditors or customers begin to lose confidence in the viability of our  business?

• How can we continue to include our partner in our decisions when he or she can no longer participate in our operations?

Will the spouse or children of the disabled partner want a say in running things?

• Will our disabled partner sell his or her interest to a competitor?

The Disabled Owner's Concerns...

If you've invested in the business, helped it grow and been a major decision-maker—and have suddenly become
disabled—you might start thinking:

• How can I hope to recover my capital investment?

• Why should I have to let someone else run my business, using my money?

• Where is the return on my money that I should be receiving, considering I helped found the business?

The Business's Best Interests...

Because of the importance of each individual, small businesses often create buy-out plans to anticipate the death or retirement of owners or partners. But, as you can see, it is equally important to set up such a plan to guard against the effects of disability.


Adequate disability income insurance or a tax-qualified sick-pay plan can take care of replacing the disabled owner's
income. But in order to finance a buy-out of the disabled partner's share of the business, the company must come up with a great deal of capital. And just where does that money come from? Most firms would find it very difficult to come up with enough after-tax cash either to set up a reserve fund in advance or to try to pay for the partner's share after the fact.

* "Why Disability," a publication of the National Underwriter

** 1985 Commissioners Disability Table (Statistics shown are based on data collected from independent disability carriers and reflect only individuals with DI policies.)



Related Topics
         
                Business Disability Products   
          
 
               
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Not all insurance products from all insurance companies are available in all states.


Note:  We do not provide legal or tax advice. The general information presented on various tax aspects contained in this site are not intended to be relied upon as tax advice. Individuals should seek the advice of a qualified tax professional regarding the taxation of these benefits as they apply to your particular situation.  These benefits are offered in all states except: AK, HI, & WY. License #'s: CA: OC38446 MT: 29724 F00-0283-LC 


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