A buy-sell agreement is a common facet of businesses that depend on the wellbeing of one or more key people. Many of these are structured to pay out benefits to cover the unexpected death of another owner, which can be essential in helping the business move forward. However, even these plans could have blind spots that business owners don’t always consider. There is another untimely event that happens with startling frequency, yet it rarely planned for: disability.
According to survey statistics from the U.S. Social Security Administration, a majority of American workers – 64 percent – assume their chances of becoming disabled and unfit for work are less than 2 percent over their lifetime. In reality, according to statistics, the chance of becoming disabled is more like 25 percent. This doesn’t just apply to the elderly or unhealthy individuals. The Council for Disability Awareness estimated that the average healthy 35-year-old woman has a 24 percent chance of becoming disabled, with the average length of her disability lasting 82 months.
Protecting what’s important
With these sobering statistics in mind, the importance of insurance against the possibility of disability becomes even more important. While many have thought of the effect death would have on the business, they forget about the impact of a key person being disabled. The American Institute of CPAs noted in a blog post that many buy-sell agreements are designed to handle the death or early retirement of executives or owners in a company. However, these plans don’t always cover disability, especially if it happens long before the typical retirement age.
Of course, there are also ways to plan for an unforeseen disability among an executive, owner or other key person. However, these come with their own substantial drawbacks:
- Cash: While saving money for an unexpected disability is relatively straightforward, allocating enough funds is challenging, and may not be possible until it’s too late.
- Loans: A loan could be taken out to cover costs, but this assumes that credit won’t be hard to come by when an urgent need for funds arises. That’s not to mention the high price of interest payments.
- Installment sale: While an installment sale could result in the deferral of some tax liability, and therefore savings, this amounts to kicking the can down the road. Future financial struggles make gains from this method far from certain.
In the end, the safest way to protect a business from this uncertainty is a comprehensive buy-sell agreement. While nothing is certain in the business world, insurance can provide a safety net for the unexpected. With a clause to cover death and disability, a properly structured business insurance plan could be among the most valuable investments a company makes.
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