Business Overhead Expense Protection Plan Š 2018 VSA, LP Valid only if used prior to January 1, 2019. 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, VSA, L.P. is not 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. 1b2-04
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 1
2
3
4
5
30
54%
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%
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
30
2.2 years
35
2.5 years
40
2.7 years
45
2.9 years
50
2.8 years
55
2.5 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.) Business Overhead Expense Protection Plan
2
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?
Business Overhead Expense Protection Plan
3
Three Alternatives A business owner who becomes disabled for a period of time has three alternatives in regard to the business: Sell 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.
Liquidate the Business
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.
Maintain the Business
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.
Business Overhead Expense Protection Plan
4
What Are Your Monthly Business Overhead Expenses? TYPE OF EXPENSE 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
MONTHLY AMOUNT $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________
$ ______________
Business Overhead Expense Protection Plan
5
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... Business Overhead Expense Protection Plan
6
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. Business Overhead Expense Protection Plan
7
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...
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.
Business or Business Owner
Tax Deductible Premiums Business Overhead Expense Policy
Insurance Company
Insured: Business Owner Owner: Business or Business Owner Beneficiary: Business or Business Owner continued on next slide Business Overhead Expense Protection Plan
8
The Mechanics of a Business Overhead Expense Protection Plan Here's how business overhead expense protection could work if the owner is disabled...
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.
Business or Business Owner Tax Deductions for Business Expenses Actually Paid
Business
Taxable Business Overhead Expense Protection Benefits
Insurance Company
Business Overhead Expense Benefits Reportable as Income The policy owner must report the business overhead expense benefits as income. However, to the extent that deductible business expenses actually paid equal or exceed policy benefits, there will be no additional income tax payable.
Business Overhead Expense Protection Plan
9
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.
Business Overhead Expense Protection Plan
10
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. Longer-Term...
Short-Term... Draft and execute a corporate resolution authorizing the purchase of business overhead expense protection insurance, if appropriate.
An annual review can help ensure that the plan remains current.
Review the issued policy.
Evaluate other business planning needs, such as a salary continuation plan.
Evaluate business continuation planning needs, such as a buy-sell plan.
Business Overhead Expense Protection Plan
11