Disability Income Planning for Business Owners Are You and Your Business Prepared to Survive if You Never Receive Another Paycheck?

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Disability Income Planning for Business
OwnersAre You and Your Business Prepared to
Survive if You Never Receive Another Paycheck?
The information contained in this presentation is
being provided with the understanding that it is
not intended to be interpreted as specific legal
or tax advice. Individuals are encouraged to
seek the guidance of their own personal legal or
tax counsel.
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The Need to Protect Your Income
As a business owner, you understand the need to
protect yourself against major risks, such as
fire, theft, natural disasters, legal
liabilities, medical cost, etc. Yet you may be
self-insuring one of your most important assets-
your income.
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What Would Disability Mean to You?
Think about this for a minute. How much income
will you earn over the next several years?
375,000? 500,000? More? How would you
replace this income should you become disabled?
Who would run your business? How would your
overhead be paid rent, electricity, employee
wages, etc. Could your business pay you, too,
until you recover?
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Most People Dont Like to Think About Disability.
But Heres Why You Should.

• 73 of people believe they would be adversely
  affected financially if they were unable to work
  for a year or longer (Source Survey by the
  Consumer Federation of America (CFA) and the
  American Council of Life Insurers (ACLI), April
  23, 2001.)
• During the course of your career, you are 3.5
  times more likely to be injured and need
  disability coverage than you are to die and need
  life insurance (Source Health Insurance
  Association of America, 2001.)
• Do you know anyone who has suffered from back or
  musculoskeletal problems, cancer, heart or
  circulatory problems, injury, depression, or
  long-term illness? These could all be causes of
  disability.

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What Constitutes a Disability?

• Disability income insurance policies define
  exactly what constitutes a total and partial
  disability that will trigger payments. There can
  be substantial differences in how disability is
  defined, so it is very important to read the
  definition in the policy carefully.
• Long Term Disability Claims most often occur
  from
• 21 - Musculoskeletal
• 13 - Cancer
• 11 - Circulatory Problems
• 10 - Injury or Poisoning

Source JHA 2000 U.S. Group Disability Rate
Study Risk Management Survey.
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Types of Disability Income Insurance Important
for a Business Owner

• Disability Income Insurance
• Pays a regular income to an insured person who
  becomes totally disabled and unable to work. The
  amount the disability income insurance policy
  pays is never as much as the person could be
  earning at work. Instead, each payment
  represents a percentage of the insured persons
  regular income.
• Business Overhead Expense Protection
• Reimburses the owner for covered overhead
  expenses up to a specified limit on a monthly
  basis during a disability. This policy can help
  assure the company employees that, in the event
  of the owners disability, the business will
  continue to operate and their jobs will be secure.

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Which of My Business Expenses Would Be Covered By
a Business Overhead Expense Policy?

• The following is a list of business expenses
  which are covered by most disability income
  insurance policies intended to help cover
  business overhead expenses
• Employee salaries
• Employee fringe benefits and payroll taxes
• Rent
• Utilities
• Telephone and telephone answering service
• Interest and principal on business indebtedness
• Association dues
• Accounting, billing, and collecting fees
• Premiums for business insurance
• Postage and stationary
• Laundry, maintenance, and janitorial service

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Which of My Business Expenses Would Not Be
Covered By a Business Overhead Expense Policy?

• Business expenses that are generally not covered
  under a business overhead expense policy include
• Salary, fees, draw account, or other remuneration
  for the owner (individual disability income
  insurance is designed to cover the owners
  personal income needs)
• Depreciation of furniture and equipment
• Merchandise and cost of goods sold
• The cost of these items are generally not covered
  expenses since they are contributing to the asset
  base of the company and are really investments
  rather than expenses

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Policy Features - The Waiting Period

• Before any benefits are paid, the insured
  generally must be disabled beyond a certain
  waiting period. During this period, the
  insurance company pays no benefits. If the
  disability continues at the end of this period,
  disability income insurance payments begin.
• Insurers offer a range of waiting periods. The
  most common are 30, 60, 90, and 120 days.
• The shorter the waiting period, the more the
  policy will cost since the insurance company will
  become obligated sooner rather than later.

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Policy Features The Benefit Period

• The benefit period is the period during which the
  insured receives disability income or business
  overhead expense payments
• Several options are available
• The longer the benefit period, the more costly
  the policy

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Taxation of Disability Income Insurance

• If an insured purchases a policy and pays the
  premiums, the premium payments are not
  tax-deductible for the individual. However, any
  benefits paid when the insured is disabled will
  be received federal income tax free.
• In an employer pays premiums on a disability
  income policy available under a qualifying plan,
  the premiums are tax-deductible by the employer.
  The insured, however, must pay federal income
  taxes on any benefits received.
• When the employer and employee share in the
  premium payments, the portion of any benefits
  paid for by the employee are received income
  tax-free, but the portion paid for by the
  employer must be reported as income in the year
  the employee receives benefits. The employers
  contribution is excluded from the employees
  taxable income, and the employers contributions
  are tax-deductible by the employer.

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Taxation of Business Overhead Expense Insurance

• Under a disability income insurance policy
  intended to help cover business overhead
  expenses, the business owns the policy, pays the
  premiums, and receives the benefits when the
  owner is disabled.
• The premiums for this insurance are
  tax-deductible as an ordinary and necessary
  business expense
• If the owner becomes disabled, the benefits
  received are considered income to the business
  and are, therefore, includible in the gross
  income of the business
• The company or owner can, however, deduct the
  corresponding business expenses, thus offsetting
  the policy benefits with expenses.

The information contained in this presentation is
being provided with the understanding that it is
not intended to be interpreted as specific legal
or tax advice. Individuals are encouraged to
seek the guidance of their own personal legal or
tax counsel.
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The Help You Need For Planning
Disability Income Insurance isnt just about
dollars and cents. Its about people. You, your
loved ones, and your employees. These people
count on you. So why take unnecessary risks?
You have worked too hard making your business a
success to take a chance on not being financially
covered should be become disabled.
For More Information, Please Contact Ricke
Associates 425 Bank Street New Albany, IN
47150 Phone [phone] Fax
[phone] www.ricke.com