There are three main corporate uses of disability income

1. replacing income of a key person
2. covering business overhead expenses
3. shareholder buyout on disability

Replacing Income of a Key Person

• benefit → business → key person
• business = policyowner = beneficiary
• key employee = life insured
• the business uses the benefits to pay the salary of the key employee, which means the original salary can be used to hire a replacement
• premium: nondeductible
• benefit period: maximum 1 year
• elimination period: very short (so benefits start quickly)

Covering Business Overhead Expenses

• reimburses company for the expenses of running the business
  • e.g., employee salaries, rent, utility bills
  • not for business owner's salary, debt payments, furniture, equipment, merchandise
• business = policyowner = beneficiary
• premium: deductible → taxable benefit
• benefit = $ per month x number of months (e.g., $5,000 per month)
  • use less → coverage extended (e.g., use $3,500 per month → $1,500 in reserve per month)
  • use more → too bad (e.g., $7,000 → $2,000 not paid)
• benefit period: 6-36 months
• elimination period
  • sickness: 15-90 days
  • accident: 0 days

Shareholder Buyout On Disability

A buy/sell agreement usually has a provision to buyout the shares of a shareholder who remains disabled for a specified length of time.

Insurance can be used to provide a lump sum after a period such as 12-24 months.

• for buy/sell upon disability
• trigger date is usually one to two years after total disability is confirmed
• buyer could be an employee, partner, shareholder or the corporation itself
• benefit
  • lump sum (usually); e.g., $500,000 to $1.5 million
    • elimination period: 12-24 months
  • monthly income
    • elimination period: 12 months
    • benefit period: 2-5 years
• the definition of disability is best set by the insurer to reduce disagreements
• to qualify, the business must
  • be at least two years old
  • provide balance sheets and income statements for the previous two years
  • have life insurance for a least the same amount
• taxation?