Business Needs of Health Insurance

MR. WATSON: The shortest of all chapters. Yeehaw!!! You need to know all four of the plans.

 

Cafeteria plans (Section 125)

MR. WATSON: The employees get to pick & choose what benefits the coverages they want most, from a menu. This allows them to tailor their plans to their specific needs. The employer allocates a certain amount of money to each employee and the employee uses this money to purchase from a variety of benefits. If the cost exceeds the amount of money allocated then the employee has to pay the difference.

 

Business Continuation Plans ****

Business Overhead Expense Insurance ***** Very important

MR. WATSON: Business overhead expense insurance is designed to reimburse the business for overhead expenses in the event the business owner becomes disabled.

MR. WATSON: Business overhead expenses include such things as

• rent,
• mortgage payments,
• utilities,
• telephones,
• leased equipment and
• employee's salaries,
• NOT the owner's salary
• Premiums paid by the business are tax deductible

all the expenses that would be paid regardless of the owner’s disability.

MR. WATSON: Would this policy pay a disabled owner’s salary? No. Business overhead expense policies do not provide compensation for the disabled owner. He would need his own personal disability plan.

MR. WATSON: So you take a doctor, the business buys a business overhead expense policy in the event he becomes disabled. It’s going to pay for all of this "overhead, rent, employees salaries" but it won’t pay for his salary. What kind of policy does he need for that? His own disability income policy.

MR. WATSON:The premiums are tax deductible. What does that mean for the benefits?

ALL: Taxable.

MR. WATSON: Very good. They’d be taxable. Make sense?

 

Key Person Disability Insurance *****

• Business buys a disability policy on a "key'employee"
• Business receives the benefit if key person becomes disabled

MR. WATSON: This is key person disability insurance. Look at my taco maker, if she were to lose her hands, could she still make tacos?

WOMAN: She could try.

MR. WATSON: Would we buy tacos from her? Who would pay for her tacos? The business is going to lose money. No one makes tacos better than her.

MR. WATSON: Listen, the business buys a disability policy on her, and the business receives the money. If she becomes disabled, the business receives the disability benefit until we find and train a successor, just like life insurance, except we are protecting the business should the key employee become disabled. The premiums are not tax deductible, therefore the benefits, if and when they are paid out, are tax free to the business.

MR. WATSON: How do we determine the key person's value? By the potential loss of revenue and by calculating the cost of finding and training a new "key person". The benefit will be paid in monthly installments for one - two years or in a lump sum. The elimination period will be 30 to 90 days.

 

Disability Buy-Sell Agreement *****Very important

• Buy-sell agreement funded with a disability policy
• Business receives the money and uses it to "buy-out" the disable person
• Two year elimnation period

MR. WATSON: What if Lebanon and I are business partners and he becomes disabled? Do I still have to pay him? Yes. I still have to pay him, he is a partner. So we can have a disability-funded buy-sell agreement. It reads as follows: If one of the owners should become disabled, then he has to wait two years (two year elimination period) before the insurance company begins paying him off. Then the disability policy would come up with a lump sum and buy the disabled owner out. Why do they make him wait for two years? To make sure he’s not going to recover and come back to work. These agreements are drafted by an attorney and provides the funds necessary for the transfer of the business.

MR. WATSON: Guys, I will tell you this. Always remember this. If the need is there for life insurance, the need is automatically there for disability income insurance. Just as the day follows the night or the night follows the day, so should a disability income policy follow a life insurance policy. Yes, ma’am?

WOMAN: Since they have that two-year period for the disability buyout, do they not have a partial disability policy for businesses?

MR. WATSON: They could. You could have a short-term disability as well. And that could cover him for up to two years. The point is, I would still have to pay him because he is a partner, wouldn’t I? If you are my business partner and become disabled, I still have to pay you. You are a partner.

MAN: Will his disability be under any occupation or own occupation?

MR. WATSON: Depends on the kind of business you have. But the guy that owns the construction company can more easily get an own occupation than the guy who’s working for him. Do you agree?

MAN: Um-hmm.

MR. WATSON: Those are three important concepts to know.

• Business Overhead Expense Policies
• Key Person Disability Insurance
• Disability Buy-outs

MR. WATSON: So make sure you know these. Those are gimmes. You should know these without any problem. Y’all understand?

ALL: Um-hmm.