Imagine being told after surgery that you cannot work for six months. You are expected to recover, but during that time you cannot meet with clients, make sales calls, oversee projects, approve every decision, or keep running the business the way you normally do.
The business, of course, keeps going.
There is still payroll, rent, insurance, software, debt, taxes, and all of the other expenses that come with keeping a company open. Clients still need to be taken care of. Employees still need direction. At home, your family continues to have its own expenses even if your usual income from the business is reduced or stops altogether.
Most business owners understand the need for life insurance and many have given at least some thought to what happens to the company when they die. Incapacity is different. You are still alive, you still own the business, and you may fully expect to return, but for a period of time the company has to function without you.
That is why business owner disability insurance needs to be considered as part of a larger incapacity and business continuity plan. Insurance may provide money, but the real question is whether the financial, legal, and operational pieces of the business will continue to work while you are unavailable.
September is Life Insurance Awareness Month, and for business owners, it is a good opportunity to look beyond what happens at death and consider what would happen if illness or injury simply took you out of the business for a period of time.
Disability Can Create More Than One Financial Problem
When someone tells me, “I have disability insurance,” that is helpful, but it does not necessarily tell me very much.
There are several different financial problems that can arise when a business owner becomes disabled, and different types of insurance may be designed to address different needs.
The first is the income you and your family depend on. If you normally take $12,000 a month from the business and that income stops, your mortgage, groceries, health care expenses, tuition, insurance premiums, and other household obligations continue. Personal disability income insurance may replace a portion of lost income, depending on the policy.
The business has its own expenses. Assume your payroll, rent, insurance, software, debt payments, and other fixed obligations total $85,000 per month. If a large part of the company’s revenue depends on your sales, client relationships, professional work, or day-to-day involvement, income may decline while those expenses remain.
Even a healthy reserve can disappear faster than expected. If the company has $170,000 available, that represents only about two months of expenses at $85,000 per month before taking continuing revenue into account.
Business overhead expense coverage may help with certain operating expenses during a period of disability, depending on the terms of the policy. It serves a different purpose from personal disability income insurance.
There may also be a third issue if the disability becomes long term or permanent. A buy-sell agreement may require another owner or the company to purchase the disabled owner’s interest. If that ownership interest is worth $900,000, having an agreement that requires a purchase does not mean anyone has $900,000 available to complete it. Disability buyout insurance may be part of the funding strategy for that obligation.
The important point is not that every business owner needs all three types of coverage. It is that you need to understand what risk each policy is intended to address.
What Would Six Months Away Actually Look Like?
One of the most useful things a business owner can do is look at the company as if he or she were going to be unavailable for six months.
Start with the expenses that are not going away. Payroll, rent, insurance, loan payments, software, taxes, professional fees, and other contractual obligations may continue whether you are working or not. Some expenses can be reduced or postponed. Others cannot.
Then look at revenue.
Which income would continue without your involvement? If you have recurring revenue, long-term contracts, or a team that can continue delivering services, some of the business may operate normally. If you personally generate most of the company’s sales or provide the service clients are paying for, the impact could be much greater.
This is where the numbers become meaningful.
At $85,000 a month in fixed expenses, six months represents $510,000 of business obligations. That does not mean you need $510,000 of insurance. The business may still have revenue. You may have reserves. Certain expenses may be reduced. Insurance may cover some of the gap.
What matters is knowing the gap instead of assuming the business will somehow work it out.
This is also where I look at TEAM, your Time, Energy, Attention, and Money. If your time and energy have to go toward recovering, who takes over the decisions and relationships that normally require your attention? How much money is needed to give the business enough breathing room for that transition?
That is a much more useful question than simply asking whether the company has some money in savings.
Money Alone Does Not Keep a Business Running
Even if the financial side is well planned, the company still needs someone who can act.
If you are the only person authorized to sign on the operating account, approve payroll, enter into contracts, or make certain ownership decisions, disability can create an operational problem very quickly.
Your spouse does not automatically have authority to run the company because you are married. A trusted employee does not automatically have authority because you have worked together for ten years. Depending on the ownership structure, even another owner may not have all of the authority you assume that person has.
The legal documents need to match the way you expect the business to operate.
That may mean reviewing the operating agreement or bylaws, powers of attorney, banking authority, employment roles, ownership agreements, and other documents that determine who can do what if you are unavailable.
This is not just a legal drafting issue. The practical details matter too.
Someone may need to know how payroll is approved, where important contracts are stored, how to access the company’s financial information, which clients require immediate attention, and who to call if a major problem arises.
A person can have all of the legal authority in the world and still be completely unprepared to run your business if you have not given them the information they need.
The Buy-Sell Agreement and the Insurance Policy Need to Work Together
There is another issue that deserves particular attention when disability insurance is being used in connection with a buy-sell agreement.
The agreement and the insurance policy may not define disability the same way.
Your buy-sell agreement might say that a purchase is triggered after an owner has been disabled for a certain period of time. The insurance company will apply the definition of disability contained in its own policy when determining whether benefits are payable.
Those standards do not necessarily match.
The agreement may also require a buyout at a time when the policy has not yet paid benefits, or the valuation provisions in the agreement may no longer reflect the actual value of the business.
That is the kind of problem that is difficult to fix after someone has already become disabled.
If insurance is intended to fund a legal obligation, I want to know that the agreement, policy, valuation method, timing, and ownership structure have been coordinated.
The attorney, insurance professional, financial advisor, and tax professional do not all have the same job, but they should be working from the same facts.
Look at the Business as One Connected System
This is one of the reasons I use the LIFT: Legal, Insurance, Financial & Tax Systems™ framework when I work with business owners.
A disability can affect all four systems at the same time.
The legal planning determines who has authority to act, how ownership decisions are made, and what happens if an owner can no longer participate in the business.
Insurance may provide income to the owner, money for certain business expenses, or funding for a buyout.
The financial picture tells us how much the business actually needs, what revenue is likely to continue, how much liquidity is available, and how long the company can operate under different circumstances.
Tax considerations can affect how a particular arrangement should be structured, including who owns a policy, who pays the premiums, and how benefits may be treated. Those issues should be reviewed with the appropriate tax professional while the plan is being created.
As a LIFTed Business Advisor, my role is not to replace the business owner’s insurance, financial, or tax professionals. I look at how those pieces fit with the legal planning, the business, and the owner’s personal estate plan so that everyone is solving the same problem.
That coordination becomes especially important when the business is also the primary source of income and wealth for the owner’s family.
What Happens the First Week You Are Gone?
A lot of planning focuses on what happens months or years later. I also want to know what happens on Monday morning.
If you are suddenly hospitalized or otherwise unable to work, who tells your employees what is happening? Who handles the clients who normally deal directly with you? Who can access the bank accounts and financial records? Who can communicate with your lender, accountant, insurance advisor, or attorney?
Who can make a decision that normally would have come to you?
Those questions are different for every business.
A company with several owners and an experienced management team may have a very different continuity problem from a professional practice or closely held company where nearly every important decision runs through one person.
This is why incapacity planning should reflect how your business actually operates instead of relying on generic documents.
The people who may have to step in should also know where to find the information they will need. That does not mean every employee needs access to everything. It means the right people should have a practical path to the information and authority necessary to keep the company functioning.
Your spouse or leadership team should also know who your professional advisors are. During a crisis, they should not have to spend the first week trying to identify your attorney, insurance professional, financial advisor, accountant, banker, and other key contacts.
Protecting the Business Also Protects Your Ability to Recover
Business owners are very good at convincing themselves that they can keep working.
You will answer the important emails. You will take the call from the major client. You will approve payroll. You will just handle a few things from home.
Sometimes that is possible. Sometimes it is exactly what your doctor is telling you not to do.
A real incapacity plan gives you another option.
If the business has adequate resources, someone has authority to act, the team knows what to do, and your family is financially protected, you have a better chance of actually stepping away when you need to.
That matters because the business is not the only thing you are protecting.
You are protecting your health, your family, your employees, the value of the company, and everything that company makes possible in your life.
Start by Looking at Your Own Business
You do not need to solve every possible scenario at once.
Start by figuring out what your business costs to operate each month and how much of its revenue would continue if you were unavailable. Look at the reserves you have, what your household would need, and what disability coverage is already in place.
Then ask who could actually run the business if you could not.
Review that answer against your legal documents, insurance coverage, buy-sell agreement, estate plan, and existing business systems.
If those pieces do not line up, that is where the planning needs to begin.
In a complimentary one-hour LIFT Business Breakthrough Session, I review your business and personal planning together and help identify gaps involving authority, ownership, funding, continuity, and coordination among your advisors.
To learn more about our one-of-a-kind systems and services, contact us or schedule a 15-minute introductory call today.