10 Sep Your Financial Health & Your Partner’s Physical Health: What’s the Correlation?
Your Partner: Future Drag on The Business?
If you have a partner(s) or key employee, you probably have a contingency plan that will indemnify you should your partner or key employee die prematurely. Most probably it is funded with life insurance.
The odds, however, are greater that disability is a bigger risk than premature death. There is a 1 in 3 chance your partner or key employee could suffer an illness or accident lasts more than 3 months. How might that affect the business and your income?
Issues to consider:
- If your partner or key employee were unable to work, who could cover? How long could such a situation be sustained? What would be the impact on the business? Your income?
- During a period of disability, would you be obligated to provide him/her with a salary or a share in the profits?
- Do you and your partner know the value of your business? When was the last time the value was reviewed, formally or informally?
If you need to sever your business agreement due to a disability, there are 4 ways to fund the buy-out:
- Cash – it could take many years to accumulate sufficient cash
- Installments from Current Earnings – this could be a drain on income for a long period of time
- Borrow – will a bank approve a loan if one of the partners is unable to work?
- Disability Buy-Out Insurance
Could you afford to buy out your partner? Can you afford NOT to buyout out partner?
- Review your partnership agreement with your lawyer to ensure it covers the possibility of disability and is up to date.
- Discuss with your accountant the best method to value your business.
- Meet with an insurance professional to review your Disability Income, Business Overhead Expense and Life Insurance coverages.
What is the difference between Disability Income Replacement Insurance (DI) and Business Overhead Expense Insurance? (BOE)
When a disability due to illness or accident curtails income, Disability Income Insurance provides the money to replace your income that pays your personal expenses like your mortgage, utilities, food on the table and all the other bills.
Business owners and professionals in their own practices have to cover the expenses of the business in addition to personal income. In times of disability, BOE keeps the business alive by providing the money to pay for typical expenses such as:
- Payroll (employee)
- Taxes Accounting and Legal Fees
- Insurance Expense
- Office supplies