Disability Insurance is Paycheck Insurance

Your ability to earn an income is your greatest resource.  If not for your paycheck, you would not be able to put food on the table, clothes on your back, or a roof over your head. However, have you ever considered what would happen if you suddenly were unable to work due to an illness or injury? How will you replace your income?  According to a survey from Life Happens, “Half of working Americans couldn’t make it a month before financial difficulties would set in, and almost one in four would have problems immediately”. This why it is important to have disability insurance.

Disability Insurance is protection for your paycheck. It will cover part of your salary if you become disabled and will end when you return to work.  There are two types of disability coverages offered. The first is short-term and will usually cover the first three months of a disability. The second is long-term. Long-Term Disability Insurance kicks in after six months.  Long-term disability coverage usually lasts for two, five or 10 years, or until age 65 or 67, depending on the policy. Disability Insurance can usually be gotten through work as an employee benefit, but it can also be obtained through an insurance company offering this coverage. Insurance purchased through a company generally replaces 40 percent to 60 percent of your income. About 60 percent of your income is typically paid to you if you get coverage through work.

 

When it comes to who should get disability insurance, the answer is clear:  Anyone who earns a paycheck should get a policy. Consider this statement from the article, Disability Insurance: Learn Why You Need It. “According to the Council for Disability Awareness (CDA), more than one in four people in their 20s will probably become disabled before retiring. The council adds that one in eight workers can expect to be disabled for five years or more before retirement.”*  Furthermore, a 25-year-old worker who makes $50,000 a year and suffers a permanent disability could lose $3.8 million in future earnings. Are you prepared to take this risk with your or your family’s well being?

You insure your home, your car, and your life.  Why not insure your paycheck? Check with your company’s benefits office to obtain information on the coverage offered. Then, take this information to an advisor who can educate you on the coverage and determine if it is the right amount for you. If your employer does not offer disability insurance, discuss your coverage needs with an advisor and find out what options are available that will meet your budget.

Matt Dressel is the Owner of the Independent Financial Solutions Group, a Registered Investment Advisor. He is an Investment Advisor, Life Insurance Agent and does Financial Planning.  If you have any questions about this article, he can be reached at 252-515-0242 or matthewdressel.ifsg@gmail.com.


(Disability Insurance Benefits could be subject to the claims-paying ability of the Insurance Company.)

Sources:

*Disability Insurance: Learn Why You Need It by Michael Chalon Smith;

LIFE Happens.org

What Can a Buy-Sell Plan Do for Your Small Business

In 2016, there were 28.8 million small businesses according to the Small Business Administration. Small Business accounts for 99.7% of U.S Businesses, which employee 56.8 million people. Here in Carteret County, the overwhelming majority of businesses are small businesses. Many are owned by partners while others are entities (C or S Corps).

No matter the ownership or number of employees, one issue that should be of concern is the death of one of the owners.  This occurrence brings several questions. What will happen to the business? Will the deceased owner have a family member who wants to step into his/her position? If so, will this person be qualified to do so? What impact will the death have on the operational and financial stability of the business? These issues and others can be addressed by a Buy-Sell Agreement funded with life insurance.

There are two types of Buy-Sell Agreements, Cross Purchase, and Entity Purchase. A Cross Purchase Agreement is usually best when a business has 2-3 owners.  In this type of agreement, the partner(s) purchase a life insurance policy on each other.  The death benefit will be approximately equal to an agreed upon purchase price. The owner and the beneficiary is the same person and the other partner is the insured. The owner pays the policy premiums which are not tax-deductible.  At a partner’s death, the surviving partner(s) receive a death benefit income-tax free from the life insurance policy owned on the deceased. The surviving partner(s) use the life insurance proceeds to buy the deceased partner’s share of the business from his/her estate at the agreed upon purchase price.  

An Entity Purchase is best used when a business has 4 or more owners. The Business and the owners enter into an entity purchase buy-sell agreement.  The Business purchases a life insurance policy on each owner. The Business is the owner and beneficiary of each policy.  

The Business pays the policy premiums which are not tax-deductible. At an owner’s death, the business receives a death benefit tax-free from the life insurance policy. The Business uses the policy proceeds to buy the deceased partner’s share of the ownership from his/her estate at the agreed upon purchase price.

With any business sale/purchase, there will be taxes involved. When it comes to the taxation of a buy-sell agreement, there are some similarities and differences between the cross-purchase and entity agreements. In both agreements, the Death Benefits are received tax-free by the partner(s) or business; however, make sure policy ownership is properly arranged so the death benefits will not be included in the deceased’s estate.  Also, in both cases, if the amount received by the estate equals the fair market value of the partnership or business at the time of death, there will be no taxable gain for federal income tax purposes. In an Entity Purchase, the business must obtain notice and consent from the insured prior to the policy being issued otherwise the death benefits will not be received tax-free. In addition, with an Entity Purchase, some C Corporations may be subject to the Alternative Minimum Tax (AMT).

A Buy-Sell Plan is a strategy most small businesses should consider. However, it is important to assemble the appropriate team to make sure the plan is structured correctly.  An attorney is required to draft the agreement so it will be legal and binding.  A Tax Professional is needed to make sure the agreement provides the desired tax results. Finally, an Advisor/Agent is necessary to write and service the life insurance policies. When done correctly, a buy-sell plan can provide an orderly succession of ownership for a business at a difficult time.

(Note- In the case of a single owner business, the owner may enter into a buy-sell agreement with an employee or interested buyer.)

Matt Dressel is the Owner of the Independent Financial Solutions Group, a Registered Investment Advisor. He is an Investment Advisor, Life Insurance Agent and does Financial Planning.  If you have any questions about this article, he can be reached at 252-515-0242 or matthewdressel.ifsg@gmail.com.

(Life Insurance Benefits could be subject to the claims-paying ability of the Life Insurance Company.)