A Business Overhead Expense Protection Plan

Transcription

1 A Business Overhead Expense Protection Plan If you are sick or hurt and unable to work, how will business operating expenses continue to be paid during your recovery? Table of Contents Page Odds of Becoming Disabled 2 How Will Business Operating Expenses Be Paid? 2 Three Alternatives 2-3 What Are Your Monthly Business Overhead Expenses? 3 Sources of Funds 4 Potential Solution Using Business Overhead Expense Protection 5 Mechanics of a Business Overhead Expense Protection Plan 6-7 Summary of Business Overhead Expense Protection Tax Results 7 Business Overhead Expense Protection Action Checklist 8 Important Information 9

2 Odds of Becoming Disabled Consider the Odds of a Business Owner Becoming Disabled for 90 Days or Longer Prior to Age 65: Age Number of Business Owners % 79% 90% 96% 98% 35 50% 75% 88% 94% 97% 40 45% 70% 84% 91% 95% 45 40% 64% 78% 87% 92% 50 33% 55% 70% 80% 86% 55 25% 43% 57% 68% 76% Source: Commissioners Individual Disability Table A (NOTE: The 1985 CIDA is the most current morbidity table available for individual disability claim experience and is in use by many State Insurance Departments.) It's also important to know that a disability lasting for more than 90 days is likely to continue for: Age When Disabled Average Duration of Disability years years years years years years Source: Commissioners Individual Disability Table A (NOTE: The 1985 CIDA is the most current morbidity table available for individual disability claim experience and is in use by many State Insurance Departments.) How Will Business Operating Expenses Be Paid During Your Recovery From a Disability? Rent, salaries, telephone, utilities and the other day-to-day costs of operating a business do not stop just because an owner is sick or hurt and unable to work. Instead, these business overhead expenses continue, just at the time when revenues may decline due to the owner's absence. What alternatives are available to a disabled business owner? Three Alternatives A business owner who becomes disabled for a period of time has three alternatives in regard to the business: A Business Overhead Expense Protection Plan Page 2 of 9

3 Sell the Business Liquidate the Business Maintain the Business This can be a viable alternative IF the owner wants to sell and IF a potential buyer with the necessary funds can be identified. Unfortunately, a forced sale of the business may mean a sharplyreduced purchase price, when compared to the value of the business as a going concern. Keep the doors of the business open until the owner can return, or until the disability is judged to be permanent. When a disability is likely to be shorter-term, most owners want to maintain the business for their return. Without a source of funds to pay business operating expenses, however, the only alternative may be to sell the business or to liquidate it, possibly on a forced basis. What Are Your Monthly Business Overhead Expenses? Type of Expense Monthly Amount Employee (not owner) salaries and benefits $ Rent $ Mortgage interest payment $ Mortgage principal payment or depreciation $ Other loan principal and interest payments $ Other depreciation $ Property taxes $ Utilities $ Telephone $ Postage $ Office supplies $ Equipment rental $ Insurance $ Advertising $ Professional services $ Dues, fees and subscriptions $ Other $ MONTHLY TOTAL $ A Business Overhead Expense Protection Plan Page 3 of 9

4 Sources of Funds What Sources of Funds May Be Available to Pay Business Overhead Expenses During a Disability? Source Evaluation Savings If you save 10% of your business revenues annually, it will take 10 years to set aside just one year's revenues. Besides, if you use your personal savings to pay business overhead expenses, how will you meet your personal financial obligations? Loan What creditor is going to lend money to a disabled business owner? Liquidated Assets Assuming a market exists, a forced liquidation of assets can sharply reduce their value. Other Owners For how long will they be able to pay operating expenses and compensate themselves without your contributions to the business? Personal Disability Income If you use personal disability income payments to cover business overhead expenses, what will you and your family live on during your recovery? There is, however, a reliable source of funds to pay business overhead expenses during a shorter-term disability... A Business Overhead Expense Protection Plan Page 4 of 9

5 A Potential Solution Using Business Overhead Expense Insurance Purchase an adequate amount of business overhead expense protection to pay business operating expenses during your recovery from a shorter-term disability. In addition to being a source of funds to pay business operating expenses in the event of a serious injury or illness, business overhead expense protection can accomplish the following: Since payment is prompt and certain, a business overhead expense policy provides cash at the exact time it is needed -- during an owner's disability. Premiums are fully tax-deductible as a business expense. While policy proceeds are taxable as received, this is offset by a business expense deduction for the actual business operating expenses paid. Both business and personal assets are protected from forced liquidation. Personal disability benefits and savings remain available to satisfy personal financial needs. If the disability is permanent, the business owner has time to arrange for an orderly sale or liquidation of the business. Business overhead expense protection provides the cash needed to pay business operating expenses during a period of disability, so that your business will still be there when you recover. A Business Overhead Expense Protection Plan Page 5 of 9

6 The Mechanics of a Business Overhead Expense Protection Plan The bottom line is that business overhead expense protection is an economical and efficient method of providing the cash necessary to keep your business operating during a shorter-term disability. Here's how business overhead expense protection could work for you and your business today... 1 Tax-Deductible Premiums Business or Business Owner Business Overhead Expense Policy Insured: Business Owner Owner: Business or Business Owner Beneficiary: Business or Business Owner Insurance Company 1. The business owner is insured by a business overhead expense policy, which is owned by either the business or the business owner. Generally, a sole proprietor owns the policy personally, while in the case of partnerships and corporations, the policy is owned by the business. The tax-deductible premiums are then paid by the policy owner. In the event the business owner is disabled, as defined in the policy, benefits are payable to the policy owner. A Business Overhead Expense Protection Plan Page 6 of 9

7 The Mechanics of a Business Overhead Expense Protection Plan Here's how business overhead expense protection could work if the owner is disabled... Business or Business Owner 2 Taxable Business Overhead Expense Protection Benefits Insurance Company 3 Tax Deductions for Business Expenses Actually Paid Business Overhead Expense Benefits Reportable as Income Business 2. If the owner is disabled, the taxable business overhead expense benefits are paid to the policy owner. Benefits are generally payable for up to two years of disability, which gives the business owner time to either recover and return to work, or to arrange for an orderly sale or liquidation of the business. 3. The policy owner must report the business overhead expense benefits as income. However, due to the extent that deductible business expenses actually paid equal or exceed policy benefits, there will be no additional income tax payable. Summary of Business Overhead Expense Protection Tax Results Premiums for business overhead expense insurance are fully deductible, regardless of the type of business entity. Benefits received from a business overhead expense policy are taxable as received. However, since the business expenses covered by the policy are deductible as paid, it's essentially a wash, assuming that benefits do not exceed actual business expenses paid. A Business Overhead Expense Protection Plan Page 7 of 9

8 Business Overhead Expense Protection Action Checklist Now Determine the amount of business overhead expense protection needed. Select the business overhead expense protection insurance policy and any optional benefits. Establish the owner s insurability. Arrange for payment of premiums. Short-Term Draft and execute a corporate resolution authorizing the purchase of business overhead expense protection insurance, if appropriate. Review the issued policy. Longer-Term... An annual review can help ensure that the plan remains current. Evaluate business continuation planning needs, such as a buy-sell plan. Evaluate other business planning needs, such as a salary continuation plan. A Business Overhead Expense Protection Plan Page 8 of 9

9 Important Information The information, general principles and conclusions presented in this report are subject to local, state and federal laws and regulations, court cases and any revisions of same. While every care has been taken in the preparation of this report, neither VSA, L.P. nor The National Underwriter Company is engaged in providing legal, accounting, financial or other professional services. This report should not be used as a substitute for the professional advice of an attorney, accountant, or other qualified professional. U.S. Treasury Circular 230 may require us to advise you that "any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor." VSA, LP All rights reserved (VSA 1b2-04a ed ) A Business Overhead Expense Protection Plan Page 9 of 9