A recent article in a local business journal carried an important and valuable message for business owners. The message was about how the sudden, yet unnecessary, collapse of a business has a deep, sometimes fatal, financial effect on many people—the owners, employees and customers. Such a collapse can only be prevented by good and complete business planning.
Perhaps due to size constraints imposed by the publisher or to the writer’s unfamiliarity with the subject, all of the facts about the loss of the business were not discussed in the article—the actual reason the business failed was that the owner became disabled and unable to continue to work.
We frequently talk and write about the subject of the missing page in a buy-sell agreement. The missing page refers to the oversight and failure to include disability of an owner in a buy-sell agreement. Yet statistics point out that disability is the most likely loss to occur during the effective period of a buy-sell agreement, and it can result in a larger financial loss than the death of an owner.
Insurance brokers, advisors and planners must fully understand the aspects of a business owner’s disablement so that the matter can be thoroughly discussed. In addition, the importance of proper and adequate funding for a buy-sell agreement must be understood and accepted.
A real case example of two unincorporated partners who own a $1 million business that started with a $50,000 investment from each partner serves as an example of what could happen in the event of one of the partners becoming disabled.
The disabled partner, lying in his bed in pain, is heavily medicated and has little strength to consider his non-disabled partner, who now has to perform the work of two people. Any strength the disabled partner has must go to consoling his wife, who is worried about her husband as well as money to sustain the family’s needs. He tells her to simply call the non-disabled partner and ask for a paycheck.
When she makes the request for her husband’s paycheck, the non-disabled partner agonizes over what he must tell his partner’s wife. He explains that he is working hard to cover for his partner, but the lack of his partner’s expertise, valued contacts and help is taking its toll on the business. The non-disabled partner then explains that there simply is no money for a regular paycheck!
Unlike the “dead death” of a partner, where the effects are obvious and immediate, the effects of living death are worse. Creation of a buy-sell agreement is the solution.
The History of Business Disability Plans
In 1958, there existed a fine basic education and sales/marketing course known as The Disability Insurance Training Council, the educational arm of the National Association of Accident and Health Underwriters. This effort was endorsed by the entry of the Life Underwriting Training Council into the field of disability insurance.
The Purdue University Life Insurance Marketing Institute was a highly respected source of education for those wishing to augment their knowledge of life insurance marketing. When Purdue expanded its horizons to include disability insurance, a natural adjunct for this marketing institute was to use its roster of talents to include disability insurance in its think tank and invent additional sales opportunities for the product.
Up to that point in history, disability insurance was called accident and health insurance and was used in a single way—to insure earned income, the only peril that had been recognized at that time.
From the Purdue Life Insurance Marketing Institute came the idea to use disability insurance in the same way life insurance was used—to fund loss. Subsequently, the first product to come out of the think tank was funding buy-sell agreements with disability insurance. Next was key person disability insurance (known as key man in those days) followed by disability business overhead expense.
Since that time many other plans have been created and made available: retirement completion plans, contract guarantee, severance agreements, loan/lease indemnification, salary continuation, venture capital indemnity, supplemental high-limit disability.
After nearly 60 years, this segment of the disability insurance business is still in its infancy, as attested to by an analysis of 33,102 proposals done in 2008. Buy-sell proposals constituted 10 percent of this total (3,055) followed by key person, overhead expense and loan indemnification.
We will examine each of these plans and their logical uses in subsequent articles.
W. Harold Petersen, RHU, DFP
RHU, DFP, is founder and chairperson of Petersen International Underwriters. He is recognized as an expert in underwriting development and policy innovation for such products as high-limit disability insurance, residual disability benefits, cash-value DI, and the expanding field of disability financial planning. The life/disability industry has acknowledged his leadership as an author, educator, motivator and leader, and has bestowed upon him the Harold R. Gordon Memorial Award (NAHU), the Will G. Farrell Award (NAIFA Los Angeles), the Lifetime Achievement Award (IDIS) and the Distinguished Service Award (NAIFA CA). His extensive industry involvement includes NAIFA, LIMRA, NAHU and The American College, all on local, state and national levels as well as IDIS. Petersen can be reached at Petersen International Underwriters, 23929 Valencia Boulevard, Valencia, CA 91355. Telephone: 800-345-8816. Email: firstname.lastname@example.org.