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Life and Disability

 

Business Overhead Expense (BOE)

Businesses may use a disability income insurance policy to ensure its continuation if the owner becomes totally disabled. This type of plan covers the overhead expenses which are usual and necessary in the operation of the business.

Overhead expense covered include monthly rental cost or mortgage payments, expenses for heat, electricity or telephone, internet, employee salaries including their health insurance premiums and other costs associated with the operation of the business.  This does not include the salary or profit of the business owner.

Overhead insurance typically has a maximum of 2 years, paid on a monthly basis reimbursing the owner for the exact overhead expenses incurred.

TAX DEDUCTIBLE as a business expense.  BOE benefits are received taxable to the business as ordinary income, but are deductible when they are paid out by the business to meet continuing expenses which they are designed to cover.

 

Key Employee Policy

A business owner would purchase this type of policy to protect the business in the event that a key-employee becomes disabled or dies.  This is important if the company is dependent upon a key person whose skill, knowledge or experience makes him/her an invaluable asset of the business. Proceeds from the insurance provide the necessary funds to find and train a new employee.  Partners may purchase this type of protection on one another.  The employer is the owner and retains all ownership rights. The benefits are paid to the business.

TAX CONSIDERATION: The premiums paid are NOT tax deductible but the benefits received ARE TAX FREE. 

 

Buy-Sell/Buy-Out Agreements

This is a legal agreement which provides for a structured continuation of the business and an amount of money to be paid to the disabled employee or decease’s family with the life or disability insurance as the funding source.  Like life insurance, some disability agreements provide for a lump sum distribution of benefits. 

TAX CONSIDERATION: Regardless of who is the premium payer or beneficiary the premiums are NOT tax-deductible and the benefits are received tax exempt.    However, a shareholder may be taxed on the gain, if any is realized, over and above his /her original basis in the stock.

 

Group Disability Insurance

Group disability insurance is a contract between the insurer and the employer on behalf of coverage provided to the employees.

Benefits of group insurance:

Underwriting consideration:  Group insurance underwriting is not as stringent as individual underwriting due to the larger number of covered persons, typically starting at 10 employees or greater.

Discounts:  Discounts on group insurance are typically provided over 3 employees.  Premiums are gender neutral so that female’s costs are significantly reduced with an employer based program. 

Disadvantages:

Offset of benefits:  Benefits paid will be offset by any benefits payable by any social insurance such as Workers Compensation or Social Security Disability.

Lack of Portability:  Group disability plans are not portable – when you leave your job, the disability benefits are terminated. 

TAX CONSIDERATIONS:  Premiums paid by the employer are tax-deductible to the employer.  The premiums paid are not considered income to the employee.  Benefits payable to the employee are taxable as ordinary income. 

If an employee pays a portion of the premiums to their disability income policy that percentage of benefit that is attributable to the employee will be received tax free.


Workers Compensation

Employers are required by law to provide Worker’s Compensation benefits to their employees.  Workers’ compensation can be purchased through the voluntary market or if an employer’s policy has been cancelled or non-renewed, it can be purchased through a State assigned risk plan.  They can also self-insure, if they are able to demonstrate to state officials they have the financial ability to do so or by posting a surety bond.  

This type of insurance is purchased by an employer to protect employees who are injured on the job. Workers compensation pays for medical expenses and weekly income for an employee injured within the scope of his or her employment.   It includes benefits for unlimited medical expenses, rehabilitation and funeral expenses, dependent benefits and disability income or loss of wages.  Most employees are eligible for this type of coverage except for seasonal and part-time employees. Disability benefit amounts vary state to state and are coordinated with benefits provided by medical plans, group disability and Medicare. 

 

Group Life Insurance

Most group life insurance policies are comprised of annual renewable term life insurance whereas individual contracts are traditionally term or whole life insurance.  The owner of the company holds the master certificate, while the employees receive a booklet explaining their coverage.

Renewable term life increases in cost each year or every several years based on age.  Because of the increasing premiums based on age, most people cannot afford to keep this type of insurance much past retirement.   Group policies may be converted upon terminating employment, typically up to 31 days, but the cost may be prohibited for many, as most require conversion to a whole life policy. 

Underwriting:  Proof of insurability may not be required for larger groups. 

For a plan to be written for a contributory offering, coverage must be written on at least 75% of the eligible employees.  This protects the insurance companies from adverse selection.  If the plan is non-contributory (employer paid), then 100% of the employees must participate for the insurer to write the plan.

TAX CONSIDERATIONS: Premiums paid by an employer for group life insurance are a tax-deductible expense.  However, a sole proprietor or partner may not deduct premiums for group life covering his/her own life since he/she is not considered to be an employee.