In the Fall 2001 Connections, SBRN Insurance Network member Mel Johnson, CLU, LUTCF, MSM, discussed the importance of buy-sell agreements as they relate to today’s small business owners. In his article, Mel presented life insurance as a means to make buy-sell agreements work.

If you missed Mel’s article, go back and read it today.

In addition to a business owner’s or partner’s untimely death, there’s another contingency to consider seriously in business planning: the Third Hazard.

The First Hazard is dying too soon. Savvy people obtain life insurance to help offset that hazard.

The Second Hazard is living too long...outliving your retirement nest egg. Proper retirement planning will cut off that hazard at the pass.

The Third Hazard, sometimes called a living death, is becoming disabled due to illness or accident, losing your ability to produce an income for a time, or for a lifetime. Approximately one person out of two, now age 35, will be disabled for at least 90 days prior to age 65, and of those disabled for at least that period, the average length of disability is two and a half years.

When two persons join together in a business partnership, the risk of disability actually increases and, as the number of owners increases, so do the chances of disability. If you’re 35, your risk of disability is five times greater than your risk of death. There’s a 1 in 1,200 risk that you’ll experience a major fire at your house. There’s a 1 in 240 risk that you’ll total your car. We live with risk every day. Take action now to turn the odds in your favor.

What do you do if your partner crashes and is seriously injured at 3 p.m. today? Do you have that buysell agreement in place? When your SBRN attorney drew up your document, did you consider disability as a contingency? If you did, good for you. There are only a limited number of people to do the work in a small business and that places a premium on the availability of each person every day. Having a disabled partner, or other key owner-employee, could be disastrous to your business. Even if the business survives the disability, profits will shrink, costs will rise, and you may need to hire a replacement.

A buy-sell agreement incorporating disability and death contingencies makes sense. Disability income insurance dollars can provide installment payments toward satisfying the buy-sell agreement. Alternatively, those dollars may be used to help keep the disabled partner on the payroll for a time to see if there’s a chance he or she may recover and rejoin the enterprise, thus temporarily shifting the payroll burden to the insurance company. Setting up the insurance policy correctly will make the disability insurance dollars income tax-free to the disabled partner and the business.

Volumes more could be considered, and you owe it to yourself and your employees to invest the time discussing disability/buy-sell agreements with your attorney and your business life insurance broker. When you own insurance, the event that creates the need creates the cash. Get those out of order and you’re on your own.

Ken Smith, CLU, FLMI, owns Insurance
Planning Services. He may be reached
at 904-285-5255 or ksmith6288@aol.com.