Spokane Journal of Business

Importance of disability insurance often overlooked

Such policies can provide businesses key protection

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It is common to use life insurance in the business setting, but have you ever considered that disability insurance may be way more important than life insurance? 

Why? Because medical technology is really good these days; hospitals and doctors are very good at keeping people alive. People are surviving things like heart attacks, cancer, strokes, and diabetes, hypertension—things that used to kill us. 

But that doesn’t mean a person can still work, perform, or make a living. For instance, statistics from the National Safety Council and other national sources show the following:

•You are 240 times more likely to incur a disabling injury than to suffer a fatal one.

•About 25 percent of Americans, one in four in their 20s, 30s, and 40s, will become disabled for 90 days or longer, with an average disability lasting three to five years.

•Nearly half of all home foreclosures are due to a disability, whereas about 2 percent are attributed to death. 

•An accident that causes a disability occurs about every second in the U.S. In stark comparison, an accident that is fatal occurs about every four minutes. 

•Unexpected illnesses and injuries lead to about 350,000 personal bankruptcies each year.

I encourage you to check out the Council for Disability Awareness (CDA), a nonprofit organization devoted solely to educating the public and raising awareness about the odds, risks, and likelihood of becoming disabled (www.disabilitycanhappen.org). There are many facts and figures as well as a calculator called the personal disability quotient to get an estimate of your chances of becoming disabled sometime in your working years. 

So what is the takeaway here? The bottom line is that your chances of becoming totally disabled are astronomically higher than that of dying. 

After all, do you find it ironic that there are more than 1,000 life insurance companies, but only about 12 that are major players in the disability insurance marketplace? Do you find it interesting that ads for cheap life insurance on the radio and the Internet are rampant, yet you never hear about disability insurance? This is because life insurance is much more profitable and your odds of dying aren’t even remotely close to that of becoming disabled.

Why do so many insurance agents, financial planners, and advisers miss this very important part of the equation? It’s due to a lack of knowledge, experience, and training and exposure to the facts. I, for example, spent the first 12 years of my career with a major, name-brand life insurance company and was never once educated or encouraged to even bring up disability insurance. Considering the facts, I think this is a travesty—and inexcusable. Knowing what I know now, I feel morally compelled and obligated to educate business owners on the truth, and I am doing just that. 

Here are some examples of how life and disability insurance are used in the business setting. 

Policies can be taken out on key employees to protect and indemnify businesses should a top employee, key to the business’s success, die or become totally disabled. Tax-free cash can provide time to weather the storm, pay bills, and attract and hire a replacement. Policies insuring the key employee usually are owned by the business, with the business being the beneficiary.

In addition, business owners can elect to provide the key employee with a portion of the life and disability insurance benefits as an extra perk for their exemplary service and maintain loyalty from the employee by attaching “golden handcuffs,” via a written agreement to remain with the employer. There can be a huge tax advantage to the business owner as well. Because the business owner is the beneficiary, he or she receives the benefits directly from the insurance company, tax free, but is able to pay out benefits to the employee as a tax-deductible expense. 

Likewise, life and disability insurance can be used to fund buy/sell agreements between business owners when a business owner dies, so a surviving business owner is provided a large amount of liquidity often needed—but which is rarely available—to make the buyout happen. 

In the case of only a couple of partners, usually only two policies are necessary, each partner taking out a policy on the other. In the case of multiple partners, sometimes the business itself will take out policies on all of the business partners, with the business being the beneficiary.

In addition, when business owners need to take out bank loans to grow or expand their business, or say, to purchase another practice in the case of a physician or a dentist, life and disability insurance often is used—even required by a lender—to insure that the lender ultimately will get its money back should something happen to the business owner. 

In the event of a total disability, this is typically done with what is called a disability business overhead expense policy, or BOE for short. Normally, those policies are used to help a business owner get reimbursed for things like payroll, office lease, or utilities, but a special rider can be added that covers a bank loan, and a collateral assignment sends the monthly bank payments directly from the insurance company to the lender. 

If you’re a business owner and are considering using life insurance to protect a key person, or your business loan, or to fund your buy/sell agreement, consider instead, making disability insurance your first priority. It’s more important than life insurance. 


Todd Radwick, president of Radwick Financial Group LLC, of Winthrop, Wash., is an insurance and financial adviser and 21-year veteran of the industry. He can be reached at 509.996.3425 or todd@radwickfinancial.com

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