Chapter 5

Chapter Five

Exploring Business Needs

Where We're Headed

In this chapter, you will learn about several types of disability insurance associated with businesses. Each coverage is an individual insurance policy designed for a special business need. Group disability coverages, which are also associated with businesses, are not included here. A separate chapter addresses group insurance. This chapter covers:

*Professional DI insurance

*Business overhead expense coverage.

*Disability buyout or buy-sell insurance.

*Key person DI insurance.

*Executive bonus DI coverage.

*Salary continuation plans.

As we proceed, you'll see how each of these can help a business avoid financial problems when business owners or associates are disabled.

Professional DI Insurance

What It Is

So-called professional disability income insurance can address a combination of business and personal needs since the professional person's work is the source of income that pays for both business and personal expenses. For insurance purposes, professional DI policies are those written for people in certain occupations that generate incomes over $100,000 annually. Insurers write professional policies for individuals who need income replacement in the range of $20,000 to $30,000 per month. Since not every insurance company is willing to provide monthly benefits in these amounts, you will want to locate those that do in order to serve this market.

Income, however, is not the only characteristic that defines this group. Eligibility is generally restricted to professionals who are independent and self-employed, but highly compensated executive employees might also be considered. Typical occupations acceptable for professional DI insurance includes physicians and other health professionals such as dentists, optometrists, psychiatrists and pharmacists; lawyers: accountants; engineers; architects; and some executives, generally PhDs or those who are otherwise highly educated. This is just a

sampling of eligible occupations. The companies you represent provide a complete list of occupations they will consider for professional DI policies.

Aside from the large dollar benefits involved, professional DI policies operate essentially like any other individual policy. As indicated in an earlier chapter, professionals are eligible for the most liberal benefits of any occupational group. Chapter Eight of this text discusses the various occupational classes more fully. Because of the high incomes involved, one of the major differences between writing professional DI policies and others is that social insurance benefits are not large enough in comparison to actual earnings to interfere with the income replacement calculations and cause over insurance problems.

The Key to the Professional's Livelihood

Reading the list of typical professional occupations above, you can see that these are people who provide vital services for society and who are frequently self-employed. Performing these services is the key to the professional person's livelihood. The inability to earn income by performing these services affects not only personal finances, but also the very life of the business itself since it is those services that keep the business operating.

Consider, for example, a self-employed physician, operating without partners and employing a small staff. If this individual is unable to work, first of all, no income is generated to pay for personal expenses. Second, no income is generated to continue the medical practice by paying ongoing business expenses, including a substitute physician to see the disabled doctor's patients. If a medical practice shuts down temporarily, patients must look elsewhere for services and there's no guarantee they will return even if the disabled physician recovers. The physician is likely to suffer a double loss: current loss of income and loss of the business he or she might have spent years building. There is no substitute for disability insurance to overcome these problems. Later you'll also learn about some specialized disability policies that address ways to keep a business intact during the disability of someone whose active working presence is key to the business.

What Competes with Professional DI Insurance

While social insurance benefits are not a significant issue, professionals often have DI coverage through a professional association, such as the American Medical Association or the American Bar Association, to name just two possibilities. While having such coverage may prompt an objection to purchasing an individual DI policy, association insurance does not eliminate the need for an individual policy.

Association policies typically may be canceled for the entire group of covered people at the insurer's option. If the individual drops his or her membership in the association, the

coverage terminates. In both cases, the individual will likely pay more to replace the coverage with an individual policy simply by virtue of being older or having developed a medical condition that increases the cost. Worse, if the person is no longer insurable, be or she will be unable to purchase replacement coverage at any cost.

An association policy probably has a more restrictive definition of total disability than your professional DI policy, as well as other less liberal provisions. For example, you may offer a noncancelable policy with presumptive and residual disability provisions and payment for rehabilitative services, features that are probably not available in the association policy. Insurers you represent might even offer some of the latest policy features such as the HIV benefit, which can be especially attractive to medical practitioners. Finally, an association policy probably does not offer riders, such as the cost of living adjustment, that are appealing to high-income professionals.

These are just some of the trade-offs people make when they buy lower-cost policies and you can use them as selling points for your own more liberal DI contracts. Professionals need not drop their association policies in order to purchase an individual DI policy, but the benefit amounts must be coordinated.

Protecting Income that Protects the Business

Earlier we stressed the potential impact of a professional person's disability on the life of the business itself. Selling to professionals can lead to additional insurance for needs such as paying business overhead expenses and funding buyouts from disabled business owners. These specialized coverages protect business interests in the event of a key person's disability-interests that are just as important and just as much at risk as the individual's personal earnings.

Protecting a business during disability is a concern for all business owners, including sole proprietorships, partnerships and closely held corporations. Small to medium-sized businesses offer the best prospects for selling specialized disability coverages for two primary reasons:

1. In raw numbers, many more smaller businesses exist than large conglomerates.

2. Small and medium-sized businesses are more accessible to you, the agent, and are less likely than large corporations to have business disability Insurance already in place.

Review of Business Types

Briefly review the three types of small to medium-sized businesses you will encounter. Sole proprietorships are businesses owned by one person who may or may not employ others in the business.

Partnerships involve two or more Individuals who jointly own businesses. A partnership, like a sole proprietorship, may or may not employ other people.

Finally, closely held or close corporations are incorporated businesses that have a very small group of stockholders. The stock of the company is not traded publicly, but is "closely held" by a small group of people. The stockholders generally both control and actively work in the business. Often, a single individual is the majority stockholder as well as the primary operator of the business. You will find numerous small businesses organized this way, running the gamut from in-home businesses to attorneys' offices. An example you've no doubt observed is a professional corporation (PC) operated by a physician or other professional person on this basis.

Let's move on now to two specialized disability policies that benefit these businesses.

Business Overhead Expense (BOE) Policy

When a business owner becomes ill or is injured and unable to work, certain business expenses continue whether or not business income is being generated at the same level as before the disability. Smaller businesses in particular can suffer significant revenue losses during even a short-term disability. Remember the previous example of a physician practicing as a sole proprietor-that person's services are the sole source of income for the business. The inability to provide services can kill the business. Professional DI policies are designed primarily to replace the individual's personal income and might provide a small amount for business expenses if the individual is willing to sacrifice a portion of personal income for that purpose. In most cases, however, additional funds are needed to pay ongoing business expenses. This is the purpose of business overhead expense (BOE) insurance.

Reimbursement of Covered Expenses

Unlike a disability income policy, the BOE does not pay a fixed monthly benefit based on the individual's earnings. Instead, BOE insurance reimburses the insured for expenses the business actually incurs, usually at 100%, rather' than the lower percentage paid as DI benefits, subject to a maximum monthly amount. Figure 5-1 illustrates basically how the BOE benefit works, using a $5,000 maximum monthly benefit. Notice in the first figure, expenses total $4,000 ($1,000 less

Figure 5-1

BOE Reimbursement

($5,000 Maximum Benefit Illustrated)

than the maximum), so this is the amount the insurer pays. In the second figure, expenses total $6,000, but the policy pays only $5,000, the maximum benefit.

The specific expenses for which a BOE policy reimburses the insured are generally those that continue during disability and which arc also accepted as deductible business expense by the Internal Revenue Service (IRS). These are common:

*Rent or mortgage payments for the property housing

*Utilities for the business.

*Employee salaries and employer-paid benefit contributions.

*Office expenses.

*Insurance premiums (other than those waived during disability).

This is just a sampling. Other items may also be covered and each business is likely to have some reimbursable expenses unique to that type of operation. With regard to mortgage payments, most insurers agree to pay only the interest and tax portions of the payment, although a few cover the entire payment.

Excluded Expenses

BOE policies typically list a number of business-related costs that are not covered. First of all, the insureds salary is never covered: this expense requires an individual disability income policy. Neither is their coverage for the salary of anyone who does the same work as the insured. For example, if the business is a partnership made up of two attorneys with five employees, the BOE policy covers the employees’ wages, but not salaries the attorneys pay themselves.

Other limitations apply, the BOE does not reimburse for:

*Salary paid to anyone who temporarily replaces the disabled insured.

*Salary paid to family members if they were not previously employed full time by the business

*Cost of goods sold or other inventory used during the period of disability; this expense is usually, but not always, excluded.

The reason there is no reimbursement for the salary of someone who does the same work as the insured is the expectation that such a person will generate at least some income that can help pay ongoing expenses, including his or her own income.

When BOE Is and Is Not Needed

You should be aware, too, that the larger the number of people involved in the business and performing the same job, the smaller the need for BOE insurance. For example, suppose a professional corporation is comprised of five geriatric physicians. If one physician is disabled, it's likely the other four doctors will continue seeing the disabled individual's patients, so the business can generate essentially the same income to pay business expenses. This would be true of any other type of business where several people performing the same function are in a position to take over the disabled person's work, at least temporarily.

On the other hand, the number of key people alone does not eliminate the need for DOE coverage since each person might have strikingly different duties. For example, a business might have four partners, one whose expertise is general management. Another is the major sales person and manages two other sales people. The third is the "numbers" person who keeps the business finances on track and the fourth is an advertising specialist. As you can see, each partner brings diverse and specialized skills to the business. As a result, one person is not necessarily able to step in and perform the work of another who becomes disabled, unlike a medical or legal partnership where skills are essentially the same among all partners.

Maximum Monthly Benefit

While DOE policies reimburse for actual expenses incurred, a monthly maximum applies as stipulated in the policy. Insurers offer monthly maximums ranging from $5,000 too as much as $20,000. However, if expenses are less than the maximum during one month, the unused portion of the benefit may be carried forward to another month when expenses are higher. For example, assuming a maximum benefit of $5,000 per month, if actual expenses were $3,000, a surplus of $2,000 remains available. If, during another month expenses total $5,500, the excess expenses of $500 may be reimbursed from the $2,000 excess. Actually, insurers use several different methods under which unused monthly benefits are made

available to the insured. We'll discuss these in more depth after you learn about DOE elimination and benefit periods.

Elimination and Benefit Periods

The most common elimination period for a DOE policy is 30 days. Insurers may offer 60- and 90-day periods as well, but longer elimination periods are rarely used since DOE policies are designed primarily to cover expenses during short-term disabilities only.

For the same reason, benefit periods are also relatively short, ranging from 12 to 24 months. Different insurance companies might offer somewhat shorter or somewhat longer periods.

Most insurers correlate the benefit period with the maximum dollar amount payable under the policy so benefits can continue beyond the stipulated period if unused benefits remain and the insured is still disabled. For example, a 12-month benefit period and a $5,000 monthly maximum correspond to an overall maximum benefit of $60,000 (12 months x $5,000). At the end of the 12 months, the insured is still disabled. Total DOE benefits paid during the 12 months equal $53,000.

12 months x $5,000 = $60,000 Maximum benefit

-53,000 BOE benefits paid

$ 7,000

$7,000 of the maximum overall benefit available has not been used. Most insurers will continue reimbursing expenses until the $7,000 is exhausted as long as the insured is still unable to work.

Monthly Benefit Applications

Immediate Reimbursement of Excess Expenses

Previously, we described a method whereby a portion of the maximum monthly benefit, unused when monthly expenses were lower, was carried over to another month when expenses were greater than the monthly benefit. In that example, the benefit was $5,000 per month and expenses during a certain month totaled $3,000, leaving $2,000 unused. Then, for a month when expenses were $5,500, this full amount was reimbursed even though it exceeded the $5,000 maximum, using $500 of the $2,000 surplus from the earlier month. In this case, the insured received an immediate reimbursement of excess expenses because the surplus was available. Obviously, if expenses had been greater during the first month, before any surplus was available, those expenses would have to be carried forward to some later time when a surplus becomes available.

When an insurer uses this method, surplus from any month(s) when expenses are lower than the maximum benefit continues to accumulate during the benefit period. At any time the insured needs to draw from the surplus because expenses are higher than the maximum monthly benefit, the surplus is then reduced by that amount. In the previous example, the $2,000 surplus was reduced to $1,500 when the insureds expenses were$500 higher than the maximum benefit. As a result, the amounts available to cover excess expenses fluctuate during the benefit period.

Reimbursement when Benefit Period Expires

Some insurers do not make the unused benefits available immediately during the benefit period. Instead, they pay only the actual expenses each month, but never more than the maximum benefit. At the end of the benefit period, if any surplus remains from months when expenses were lower than the maximum benefit, the insured may receive the excess at that time.

For example, with a $5,000 monthly benefit stipulated, here is how the following actual expenses would be reimbursed during the benefit period. We're assuming a 12-month benefit period and have not illustrated the elimination period, when no benefits are paid.

Actual Amount Unreimbursed

Expenses Paid Expenses

$5,400 $5,000 $400

$4,900 $4,900 -0-

$5,100 $5,000 $100

$5,300 $5,000 $300

$4,750 $4,750 -0-

$4,800 $4,800 -0-

$5,400 $5,000 $400

$5,300 $5,000 $300

$5,250 $5,000 $250

$4,600 $4,600 -0-

$4,500 $4,500 -0-

$4,300 $4,300 -0-

$59,600 $57,350 $1,750

At this point, the insureds business has incurred $1,750 more in expenses than the policy has reimbursed. However, the insurer has paid out only $57,350 of the maximum $60,000 available ($5,000 per month for 12 months), leaving unused benefits totaling $2,650.

$60,000

-57,350

$ 2,650

Since the benefit period has now ended, the insurer will reimburse the $1,750 to the insureds business, after which $900 ($2,650 - 1,750) still remains. If, during the next month, the insured remains disabled and has at least $900 of covered expenses, many insurers will reimburse this additional $900 even though the benefit period has expired.

Using either of the methods described, you can see that the insured must find another source of income to make up any shortfall between expenses incurred and expenses reimbursed by the BOE policy-and this is in addition to expenses incurred during the elimination period when no benefits are paid. A third method gives the insured a head start on covering expenses.

Elimination Period "Credit"

This reimbursement procedure allows a “credit” toward future expenses to be established during the elimination period. While the insured still must absorb the expenses incurred during this period, one month's maximum benefit becomes available immediately following the elimination period to help pay expenses that exceed the monthly benefit. Assume again the monthly benefit is $5,000 and the elimination period is 30 days. The insured is disabled and the $5,000 "credit" is established, after the elimination period, the first month's covered expenses total $6,000. Under the other reimbursement methods, only $5,000 is paid and the $1,000 excess must be carried forward until some future time when (1) expenses are lower, resulting in a surplus. or (2) the benefit period ends and a surplus is available.

Under this third method, however, because of the $5,000 "credit" from the elimination period, the insurer will pay the full $6,000-the $5,000 maximum monthly benefit plus $1,000 from the "credit." The $5,000 put in place during the elimination period is now reduced to

$4,000. The insured can continue to draw from the $4,000 during months when expenses are higher than the monthly benefit. When expenses are lower than the monthly benefit, the difference is added to whatever remains of the "credit" at any given point, with the surplus fluctuating during the benefit period as surplus amounts are added or amounts are deducted to cover excess expenses.

Other BOE Policy Features

Following are several additional features that typify BOE policies. Most business overhead expense policies are either guaranteed renewable or noncancelable until the insureds age 65. The most common definition of disability that triggers coverage is:

The inability to perform the substantial and material (or

usual) duties of the insureds regular occupation as the

result of injury or sickness as defined in the policy.

Injury and sickness are generally defined the same or comparable to definitions provided in Chapter Two.

Most BOE policies include a premium waiver provision that becomes effective when the insured has been disabled for the lesser of 90 days or the length of the elimination period. After the stipulated period, the waiver may be retroactive to the first day of disability.

Like disability income policies. BOE policies often pay benefits for presumptive disability. waiving the elimination period and ignoring the definition of total disability when the insured suffers loss of limbs, eyesight or similar injuries. If the insured dies while disabled, a BOE policy might also pay transition benefits to the insureds survivors for a short period-usually up to two months after the insureds death-if unused benefits remain available.

Partial or Residual Disability

Under many BOE policies, expense reimbursement benefits cease as soon as the insured returns to work. Other policies, however, pay a type of partial or residual disability benefit if the insured returns to work part time or is able to work full time, but is unable to perform all of the previous duties. Such benefits are handled in a variety of ways: four possibilities follow.

Full Benefit for 50% Earnings. Some policies continue paying the monthly BOE benefit only if the insured returns to work and cannot earn more than 50% of the pre-disability income. For example, assume a monthly benefit of $6,000 and pre-disability earnings of $10,000 per month. Following total disability, the insured is able to work part time only, earning $5,000 the first month-exactly half of prior earnings. Expenses for that month are $6,200. Because the insureds earnings are 50% less, the maximum monthly benefit of $6,000 is paid. The next month, the insureds earnings are still at $5,000 and expenses are $5,800. The full $5,800 is reimbursed. But let's say that in the third month, the insured can work longer and earns $6,000. Now the insured has income that is more than 50% of pre-disability earnings, so the DOE policy pays no benefits.

One-Half Policy Benefit. Other policies pay one-half the benefit that would normally be paid for a stipulated period after the insured returns to work-three or six months are common periods. For example, suppose the period is three months and the maximum monthly DOE benefit is $6,000. Here are actual expenses during the first three months after the insured returns to work part time and the amount the insurer will pay:

Actual

Expenses Reimbursement

$59000 $2,500 (1/2 actual expenses)

$6,200 $3,000 (1/2 maximum benefit)

$6,000 $3,000 (1/2 actual expenses)

Income Offset. A third way insurers pay partial BOE benefits is by offsetting from the monthly expenses the amount the insured actually earns upon returning to work. For example, suppose the insureds reduced earnings during the first month after disability total $4,000. Covered expenses for that same month total $7,500. Subtracting the $4,000 earnings from the $7,500 expenses results in a partial benefit of $3,500 for that month. As long as benefits are being paid, the amount is recalculated each month, using actual earnings and expenses after the fact.

True Residual Benefit. Finally, some BOE policies pay a true residual benefit calculated in the same way as described in Chapter Two. First, a calculation is made to determine the percentage of income lost after returning to work in comparison to pre-disability earnings. That same percentage is applied to the monthly BOE benefit that would otherwise be paid.

For example, the insured earns 40% less than pre-disability earnings during the first month she returns to work. Covered BOE expenses total $4,000 that month. The maximum BOE benefit is $5,000. In this case, the policy pays 40% of actual expenses, or $1,600 (.40 x $4,000).

Let's say the same person earns 40% less in a month when expenses total $5,200. Since the maximum benefit is $5,000, the residual benefit this month is 40% of $5,000 or $2,000. The percentage of income lost and the residual benefit amount are both recalculated each month the benefit is paid.

Riders

Certain policy riders are frequently offered to business people who apply for business overhead expense coverage. Two of these are the guaranteed insurability rider and the cash value/return of premium rider discussed in Chapter Three. If you need to refresh your memory about these two riders, please review that chapter.

Substitute Salary Rider

You'll recall that one expense item not covered by the standard DOE policy is salary paid to someone who temporarily replaces the disabled insured at work. The substitute salary rider helps close the resulting expense gap. Policies vary, but the amount of the benefit is generally either:

*50% of the maximum monthly BOE policy benefit, or

*A stipulated percentage of the insureds pre-disability salary.

Let's suppose the BOE policy benefit is $4,000 per month and the insureds former monthly income is $7,000 per month. While the insured is disabled, a benefit of $2,000 per month (50% of $4,000) helps pay the salary of someone substituting for the insured. Alternately, the policy might pay 70% of the insureds former salary-$4,900 in this case. Be sure you know exactly how the rider works for policies you sell.

The rider becomes effective as soon as the elimination period is completed, provided the business is actually incurring expenses to pay a substitute worker. The substitute must be a person who is qualified to perform the insureds job and who is not a family member. This includes a spouse's family. Payment of substitute salary benefits is generally limited to either six or 12 months, depending on the policy.

Claims-Made Malpractice Liability Rider

A rider that addresses the costs of claims-made malpractice liability insurance will be of particular interest to professionals subject to malpractice lawsuits. Before we discuss the rider, let's briefly talk about the insurance itself. Malpractice liability insurance is similar to the Errors & Omissions Insurance many agents purchase to protect themselves against client lawsuits claiming the client was harmed by something the agent did or did not do. Malpractice liability insurance for physicians, as an example, protects them against patient lawsuits claiming the patient was harmed by something the doctor did or did not do while treating that person. The premium for malpractice insurance is covered as a business expense under the BOE policy, so that basic premium Is not what we're concerned with here. We are concerned with the cost of an endorsement that Is required because of the peculiar nature of a claims-made liability policy.

This rather awkwardly named policy is complex in terms of how claims are judged to be payable. While space does not allow a complete discussion of a claims-made policy, we will briefly explain how it works. A claims-made policy covers only liability claims that were first made against the insured while that particular policy was in force. In other words, if the policy expires before a claim is filed, the policy no longer protects the insured against that claim, even though the event that led to the claim occurred during the policy period. A claims-made policy differs on this specific point from an occurrence policy, which pays only for events that occurred during the policy period even if the claim itself is made after the policy has expired.

Since claimants sometimes file a claim long after an event occurs, it is possible for the claims-made policy to have expired and been replaced by a different policy before the claimant files, leaving the insured unprotected. This quirk makes it necessary for owners of

claims-made policies to buy an extended reporting period (ERP) endorsement that keeps the insurance coverage intact for a specified period after the policy expires solely for events that occurred during the policy period but for which the claim has been delayed beyond the policy expiration date.

For example, suppose a physician's claims-made policy was in effect from June 1,1991 to June 1,1994. During the policy period, on May 23, 1994, the physician treats Patient Smith-eight days before the policy expires. The physician now acquires an occurrence liability policy to replace the expired coverage. On August 1,1994, two months after the claims-made policy expires, Patient Smith files a malpractice liability claim, citing problems that arose during the treatment on May 23. The new occurrence policy does not apply because the treatment did not occur during its policy period. Unless the insureds claims-made policy has the extended reporting period endorsement, that policy won't pay because the claim was not first filed while the claims-made policy was still in force. With the ERP endorsement, however, the claims-made policy will cover this event even though the claim was not first made during the policy period.

Figure 5-2 further illustrates how the ERP endorsement applies. In a situation such as the physician faced in the previous scenario, the ERP endorsement can be vital. Without the ERP, the physician would have had no liability coverage at all for this particular claim. Therefore, the ERP is quite important to people with claims-made liability policies. And the ERP is also quite expensive. The premium for the ERP endorsement can be up to 200% of the premium for the insureds previous year's entire liability policy. So, if the physician had been paying $20,000 per year for the malpractice liability insurance, adding the ERP may cost as much as $40,000.

The purpose of the malpractice liability rider is to continue paying the ERP endorsement premium while the Insured is disabled. Most riders pay 100% of the ERP premium, but some might pay a lesser percentage as stipulated in the rider. Typically, the insured must be disabled for a certain period-usually six or 12 months-before the rider pays the ERP premium.

Figure 5-2

Claims-Made Policy & ERP Endorsement

Before you sell this rider, you must know what type of liability policy the insured has in place since this is needed only for claims-made policies. If the individual has an occurrence policy rather than a claims-made policy, the rider is not needed since the only requirement for the insureds coverage to apply under this type of liability policy is that the event occurs during the policy period. With an occurrence policy, when the claim is actually made is not relevant as it is with a claims-made policy.

The insurers you represent might offer other riders designed to benefit disabled professionals and other business owners. Be sure to find out all of the options you can offer your clients.

When BOE is Not the Answer

Business overhead expense coverage is intended to cover business expenses for a relatively short time. BOE is a temporary measure that assumes the disabled person will eventually recover and once again be a fully functioning member of the business. Some people, however, will remain disabled indefinitely, with no hope of returning to the business any time in the foreseeable future.

Permanent disability usually requires the individual to sell his or her interest in the business. Another type of insurance is available to allow the remaining business partners or stockholders to buy the disabled person's share at a price that is fair for both the seller and the buyers. Insurance designed to fund such a purchase is called disability buyout or disability buy-sell coverage.

Disability Buyout or Buy-Sell Insurance

You may be familiar with the concept of buy-sell agreements funded by life insurance and designed to allow an orderly buyout of a business interest when a business owner dies. Similarly, when a business owner is permanently disabled and has no hope of returning to active participation, disability buyout or buy-sell insurance can accomplish transfer of the business interest.

The need for such an agreement in the case of permanent disability is, perhaps, even more urgent than for buy-sell life insurance. As you've learned, mortality rates have improved while morbidity rates have deteriorated, which means a business owner's disability is more likely than death to threaten the financial stability of a business. When an owner is disabled, both personal and business expense continue, so the disabled person's need for income from the business does not diminish. From a humanitarian point of view, the disabled owner's business partners are likely to want to provide financial assistance, whether or not the business can actually afford to do so. The result can be both a moral and financial crisis when

perceived obligations to the nonproductive disabled partner strain the financial resources of the business.

Disability buyout insurance, arranged before disability occurs, provides a guaranteed way to avoid many of the problems associated with a business owner's disability. This type of coverage allows the non-disabled business owners to buy the disabled person's interest so the business is saved and the disabled person is compensated. When the business is a partnership, the buyers are the other partners. When the business is a close corporation, the buyers are the stockholders. Even a sole proprietorship may use disability buyout insurance to fund such an agreement, with the buyer being some other specified party.

A buy-sell agreement is a legal document that requires the services of the insureds attorney and accountant. Your role as an agent is to provide access to the insurance policy that funds the agreement. insurance is the only funding mechanism guaranteed to be available exactly when needed-when disability occurs, in this case.

Cross-Purchase Plan

One type of buyout agreement is called a cross-purchase plan, under which each business owner purchases a policy covering the potential disability of each other partner or stockholder. The funds from each policy are payable to the person who purchased the policy if one of the business owners becomes disabled. The person who receives the funds from the policy then uses that money to purchase the disabled person's business interest. If there are two partners, for example, the remaining partner purchases the entire interest of the disabled partner. If there are three partners, each of the two remaining partners purchases half of the disabled partner's interest, and so forth, depending on the number of people involved. The three illustrations in Figure 5-3 (on page 87) show you how this works. Refer to this figure as you read the paragraphs following.

Partner 1 purchases two-disability buyout policies-one each covering the potential disabilities of Partners 2 and 3. Likewise, Partner 2 buys policies covering Partner I and Partner 3. And Partner 3 buys policies covering Partners 1 and 2. Six disability buyout policies are involved.

In the second part of Figure 5-3, Partner 3 becomes disabled and triggers the buyout. The policy benefits from the policies Partners 1 and 2 own are paid to these two partners separately. Partners 1 and 2 then pay the proceeds to disabled Partner 3 in order to purchase Partner 3's business interest. Partners 1 and 2 continue to operate the business and Partner 3 are compensated.

And finally, the original policies Partners 1 and 2 purchased, covering each other, remain intact. At this point, each individual's business interest has increased, so the original amount of insurance on these policies is no longer adequate. As an agent, if you have actively

serviced this account, you now have the opportunity to advise the remaining partners about the need for additional coverage and to close this sale.

Entity Purchase Plan

Another method for funding a buy-sell agreement is through an entity purchase plan. In this case, rather than each individual business owner buying a policy on every other owner, the business entity itself buys as many individual policies as there are owners. In the previous

example, the business entity would have purchased three individual policies-one covering each owner. Let's say that the name of that business is The Three, Refer to Figure 5-4 (on page 88) as you read the paragraphs following.

In the first part of Figure 5-4, you see that The Three buys one disability buyout policy covering Partner 1, one policy for Partner 2 and one policy for Partner 3-three individual policies instead of the six that were needed under the cross-purchase plan. The Three owns these policies rather than each individual partner owning the policies on the others.

Then, Partner 3 is permanently disabled, triggering payment of the disability buyout policy benefits. The proceeds are paid directly to The Three partnerships, which owns the policy-covering Partner 3. The Three uses the policy benefits to buy Partner 3's business interest, which then becomes the shared interest of Partners 1 and 2.

Finally, the original policies covering Partners 1 and 2 and owned by The Three remain intact. Again, because the individual interests of Partners 1 and 2 have increased, they need additional insurance to cover their interests in the event either of them becomes disabled in the future.

Figure 5-3

Cross Purchase Plan

(Three Partners Illustrated)

Each of these arrangements has its own tax consequences when premiums are paid and when a claim is paid. You'll learn the details in the tax chapter later in this text.

The Buyout Policy Benefit

When the legal buy-sell agreement is written, it spells out exactly how the business Interest is valued. This valuation is the basis for the disability buyout policy benefit amount. Some insurers specify a lump-mum benefit representing from 80% to 100% of the individual owner's interest. For example, if one person's business interest is valued at $100,000, a policy that pays a lump-sum benefit at 80% pays $80,000 when that person is permanently disabled and the buyout is triggered.

Figure 5-4

Entity Purchase Plan

(Three Partners Illustrated)

Another insurer might write the policy for 95%, paying $95,000, and still another pays 100% or $100,000, Check with the insurers you represent to determine what percentage of an individual's business interest they are willing to cover. The maximum benefit available differs from insurer to insurer, usually ranging from $25,000 to $1,000,000 for the smaller business market.

Not all disability buyout policies pay the funds in a lump sum. Other insurers pay monthly benefits either to a trustee or to the other business owners during the benefit period specified in the policy. The monthly benefits from the disability buyout policy then provide the funding that allows the non-disabled owners to make installment payments to the disabled person for a specified period. In this case, the buy-sell agreement should be written to stipulate that the purchasers will pay installments of a certain amount at a stated rate of

interest, backed up by a promissory note guaranteeing that the purchase transaction will be completed. Check with your insurers to determine how their policies handle payouts. Some insurers offer both options. The ultimate purpose, whether funds are paid in a lump sum or in installments, is the same for the disability policy as for a business life insurance policy-to provide the buyout funds when an owner is unable to continue in the business.

Indemnity vs. Reimbursement

A disability buyout policy may be written to pay the benefit on an indemnity basis or a reimbursement basis. Under an indemnity policy, the maximum benefit stipulated in the policy is paid in full when the buyout occurs. If the maximum benefit is $100,000, the insurer pays $100,000 for the buyout.

Under a reimbursement policy, however, the insurer may reduce the benefit it actually pays if the value of the business interest is less than it was at the time the policy was written. The insurer might specify that the benefit, paid will be determined by a valuation than it was at the time the policy was written. The insurer might specify that the benefit paid will be determined by a valuation formula specified in the buy-sell agreement when it was executed. For example, suppose a $100,000 policy covers the potential disability of partner Wilson. When Wilson becomes disabled, triggering the buyout, the value of Wilson's interest has diminished to $90,000, due to economic conditions and application of the valuation formula. Under a reimbursement policy, the insurer will pay only $90,000 to the partner or entity that owns Wilson's policy.

Elimination Period

Disability buyout insurance has a relatively long elimination period since business owners typically would not want to sell their interests before they are absolutely certain they cannot return to the business. A long elimination period allows time for full recovery before the buyout is triggered. Because statistics indicate that a person who has been disabled for a year is unlikely to completely recover, 12-month elimination periods are most common. Insurers also generally offer 18 and 24 months and less commonly, 36 months.

The end of the elimination period triggers the buyout and payment of the policy benefit. When that happens, there is no turning back; the buyout must occur. You can see, then, that selecting the elimination period is an important component of the disability buyout transaction. The insured must feel comfortable that the period selected is adequate to delay the sale until such time as there is no hope the disabled insured will be able to return to work.

As a rule, disability buyout policies, unlike other disability policies, do not require a continuous run of days or months to fulfill the elimination period. This is a safeguard to allow the insured to attempt to return to work without forfeiting any of the privileges under

the policy. For example, suppose an individual's elimination period is 12 months. After six months of disability, this person attempts to return to work, but two months later the disability recurs and it seems unlikely the individual will ever be able to participate fully in the business. At the time of the recurrence, the elimination period picks up from the point at which the insured returned to work. So, rather than being required to start a new 12-month elimination period, the insured needs to fulfill only six more months, the first six having occurred during the first phase of disability. The end of this six-month period then triggers the buyout. As is generally true of recurrent disability provisions in disability income policies, the disability typically must recur within six months to be considered part of the same condition. For the example above, if the insured had the recurrence, not two months, but nine months after returning to work, a new elimination period would be required.

Definition of Total Disability

In a disability buyout policy, the usual definition of total disability is:

Because of accident or sickness, you are unable to perform

The substantial and material duties of your regular

occupation and you are not actively at work in the business.

Note the qualification that the Insured is "not actively at work in the business." This is important because the buyout is not triggered if the insured is able to work in the business in any manner.

Also notice that this definition uses the "own occupation" terminology which indicates the insured could work at another occupation in some other business. The disability buyout policy would still pay the benefit to purchase the insureds interest in that particular business.

Other Features

Disability buyout policies are generally renewable until a specified age, usually 62 to 65, with no premium increases permitted. This makes the policy essentially noncancelable, but buyout policies will terminate if the insured stops working full time in the business. Otherwise, the policy may not be canceled unless the premiums are not paid.

Most policies have a premium waiver feature, effective after 90 days of disability and continuing either until the insured recovers or the buyout occurs.

Other Business Applications

The section just concluded focused on insurance that covers the financial needs of owners, stockholders or other business principals. Disability insurance has other applications for

individuals who may or may not be owners and principals. In some cases, business owners use insurance coverages as extra benefits to reward valuable employees and/or to protect the financial stability of the business if a key person who is not an owner becomes disabled.

remainder of this chapter discusses some of these applications.

Key Person Disability Insurance

Especially in smaller businesses or businesses that offer a unique product or service, people who are considered key to the business are often owners. However, in any business, a key person might be an employee whose talents are critical to the business. In either event, key person disability insurance is designed to protect the business, not the individual, if the key person is disabled. The key person should, of course, have an individual DI policy to protect his or her own income.

How It Works

A key person disability policy provides a business with funds that can be used for various purposes. including:

*To replace a disabled key person either temporarily or permanently.

*To pay ongoing expenses that are no longer being offset by the key person's

contribution to the business.

*To cover other costs and to help alleviate financial problems arising from or

increased by the disability.

The business purchases and owns the policy covering the disability of a certain person. if that person does become disabled, the policy benefits are triggered. The insurer pays benefits to the business, not to the insured person, and the business may then spend the funds on various expenses. Figure 5-5 (on page 92) illustrates how the coverage works.

If you are familiar with key person life insurance, you can see that the disability coverage fills a similar need. We remind you again that, since the odds of disability are greater than the odds of death occurring in the near future, there may be a greater need for key person disability insurance. Business owners are likely to overlook this type of insurance. S so you can provide a significant service by discussing this need.

Who Is a Key Person

Identifying key people in a business is one of the primary obstacles to successful sales, especially when you are considering non-owners. In most cases, those who own the business

are key people, but the decision becomes more difficult in identifying others who fit the description. Generally, a key person is one whose ongoing contribution is critical to the financial health of the business. The loss of that person's services must have a significant economic consequence to the business in order for this coverage to be written. You should look for characteristics such as unique skills, business contacts, technical knowledge or other contributions that could not readily be replaced by someone else.

Let's contrast someone who does not fit the profile of a key person with someone who does. For example, it is too simplistic to assume that a highly paid employee is a key person for insurance purposes, especially when that person is employed by a large business. Such a person may, indeed, be a highly paid and highly respected executive of a large business, but if the business employs others who could step in immediately to assume that person's responsibilities, negative economic consequences would be nonexistent or minimal at worst. This person, then, is not a candidate for key person disability insurance. On the other hand, a similar individual employed by a small to medium-sized business that doesn't employ anyone else with the same talents is likely to be a key person for insurance purposes. Some insurers, in fact, do not write key person insurance for large companies, but only for smaller businesses.

Figure 5-5

Key Peson Disability Insurance

Key person disability coverage is a relatively new insurance concept and insurers are still experiencing some underwriting difficulties because of the ambiguities involved in identifying key people. Furthermore, someone who is, 'key" today might not be as important to the business tomorrow. For example, key person insurance might be written to cover the disability of a small business's sales manager. As time passes, the sales force grows and the sales operation is no longer so dependent on the sales manager's activities. While this person remains valuable to the business, others could take over the sales responsibilities in the event of disability. Insurers are naturally reluctant to pay claims for a person whose disability no

longer has a significant financial impact on the business. Additionally, the business owners now have less incentive to encourage the formerly key person to return to work. These are some of the problems associated with key person disability insurance that insurers continue to address in order to develop acceptable policies.

Common Features

Elimination periods of 30, 60 and 90 days are typically available for key person insurance. When the elimination period passes. the policy pays month]y benefits directly to the business. The "own occupation" definition of total disability you learned earlier is the trigger for benefit payments after the elimination period ends.

Because key person insurance is considered a short-term coverage, the benefit period is short six, 12 and 18 months are the terms commonly offered. The policy is written with the assumption the individual will recover and return to work or will be replaced.

Key person disability coverage generally includes a waiver of premium provision, effective after 90 days of disability. Policies are guaranteed renewable to the insureds age 65 as long as the key person continues to be employed full time by the business that purchases the policy.

Benefits

Another key person disability underwriting uncertainty is the amount of the monthly benefit. Unlike a policy that replaces a wage earner's income, this coverage is intended to help replace dollars representing the individual's value to the business-a nebulous figure and one that exceeds the salary paid to the key person.

Different insurers are likely to have different methods for determining the coverage, but a common measure is twice the individual's monthly salary. A policy covering the disability of a key person earning $4,000 monthly could be written, then, to provide the business with an $8,000 monthly benefit. Part of the benefit could be used, if the business desires, to replace the key person's income if he or she does not have a personal DI policy and if the business wants to pay the salary during disability in order to retain the employee. The remainder of the benefit can then be used for other expenses associated with the person's absence. A maximum monthly benefit is also stipulated.

Another way to write the benefit is to have two policies paid for by the business. One is the key person insurance payable to the business and the other is a personal DI policy for the key person's personal use, with these benefits paid separately and directly to the key person by the insurer.

Personnel Replacement Rider

Although the key person disability policy benefits may be used to defray the costs of replacing a disabled person either temporarily or permanently, some companies also offer a separate rider for this purpose. The personnel replacement rider is designed to cover costs incurred for permanent replacement of a disabled employee. Typical covered expenses include:

*Employment agency or search firm fees.

*Advertising in newspapers and periodicals.

*Travel, food and lodging expenses associated with interviewing.

*Moving expenses for the replacement person.

*Up to three months' salary for the replacement person.

The amount of insurance available ranges widely from insurer to insurer, from as little as $1,000 to as much as $50,000, paid in a lump sum. However, the rider pays on a reimbursement basis, which means the insurer pays the lesser of actual expenses or the maximum benefit. The business must prove that the expenses were actually incurred.

The rider applies only after the key person has been disabled for a specified period, such as six months. Following that period, the business must incur replacement expenses within one additional year, Figure 5-6 provides an example of how the rider works, assuming a $10,000 maximum benefit.

Check with the insurers you represent to determine who offers this rider and on what basis.

Figure 5-6

Personnel Replacement Rider

($10,000 Benefit Illustrated)

Executive Bonus DI Insurance

The key person insurance we just discussed is written to benefit the business, not the individual. Businesses may also purchase coverage that pays income directly to certain employees. This coverage is commonly called executive bonus disability income insurance, and is provided separately from any group disability coverage (covered in the next chapter). As you'll see, group coverage must benefit nearly all employees of a business and meet stringent nondiscrimination guidelines. Executive bonus DI, on the other hand, is not subject to those rules and can be used as a reward or bonus for selected employees. You may be familiar with executive bonus plans built around life insurance. The principles are the same for executive bonus disability income insurance

Section 162 Plans

Any type of executive bonus plan may be called a Section 162 plan, referring to the particular part of the Internal Revenue Code that allows businesses to take tax deductions for such bonuses and other expenses. Section 162 requires the expenses to be “reasonable,” without defining the term. What constitutes a reasonable amount is largely a matter of common sense and the particular situation. For example, a $20,000 bonus paid to an employee earning $15,000 annually would probably not be considered reasonable and might raise a red flag for the Internal Revenue Service. On the other hand, a bonus equal to 10% of an individual's income probably is reasonable.

Bonus dollars that fall under this section can be used to purchase life or disability income insurance policies for executives a business wants to single out for a reward. Because Section 162 plans need not meet the stiff regulations associated with other employee benefits, the business may selectively choose who will be rewarded by such a plan.

Premium Payment and Taxes

Although we'll discuss taxes more fully later, it's appropriate to address them briefly here so you can see why it is important to set up an executive bonus plan in a certain manner. If the business itself pays the premiums for executive bonus DI insurance, any disability income benefits the insured receives are fully taxable to the insured. On the other hand, if the executive/insured pays the premiums, benefits are not taxable as current income.

Therefore, an executive bonus plan typically operates like this: The business pays the bonus to the executive, who then uses the bonus monies to purchase an individual DI policy. The business is able to take a tax deduction under Section 162 for the amount of the bonus. The executive must pay current taxes on the bonus, but paying taxes while working is generally preferable to paying taxes while disabled and living on reduced income-which would be required if the employer paid the premium for the insured. Figure 5-7 (on page 96) illustrates this most advantageous way to set up an executive bonus DI plan.

Other Advantages

When the executive bonus DI insurance is established as described above, the DI policy is Jjst like any other individual DI policy for which the executive would otherwise be eligible. Benefits, elimination and benefit periods, and other provisions are the same. The only real difference from the insureds point of view is that the insured does not have to pay the premiums out of pocket: the yearly bonus from the business pays the premiums.

Because the policy belongs to the executive, not to the business, the policy does not terminate if the individual leaves that particular employer (which is what happens with group DI insurance). If the executive leaves the job, of course, he or she must then pay the insurance premiums to keep the policy in force. However, this is a small trade-off against the possibility of either being completely uninsurable or being required to pay higher premiums because of advancing age.

Salary Continuation

Another way for a business to selectively provide short-term income for disabled employees is through a formal salary continuation plan, sometimes called a sick pay plan, funded with disability income

Figure 5-7

Executive Bonus DI Insurance

policies. Under Section 105 of the Internal Revenue Code, employers may establish such plans and take a tax deduction for contributions made on behalf of their employees. Section 105 also allows for plans to address an employee's death or retirement needs, using life insurance for funding.

A salary continuation plan allows an employer to continue paying the regular wages of an insured who is temporarily off work because of an accident or illness. Many employers want to offer this benefit to their valued employees and often try to continue paying salaries from operating income. However, using current income for this purpose can place a financial strain on the business, so most companies could not continue paying salaries for long periods.

A funding mechanism, such as a DI policy, solves the problem of salary continuation expenses. Furthermore, a formal, written plan is necessary for the employer to meet Section 105 regulations and deduct the cost as a business expense. Many businesses are not aware that the plan must be formalized to qualify for Section 105 tax breaks, so you can offer this knowledge as part of selling the concept. Because these plans are not subject to employee nondiscrimination rules, employers may offer benefits somewhat selectively. For example, the plan can provide different benefits at different income levels and based on years of service with the employer. Here's an example:

Benefit Period

Weekly Maximum Years Employed

Income Weekly Benefit Under 5 Years 5 Years & Up

Up to $575 100% of Income 14 days Up to 2 years

Over $575 100% of Income

up to $1,500 14 days Up to 5 years

Under this arrangement, all employees can receive salary continuation funds for 14 days. Employees who have been with the business five years or more receive benefits even longer, depending on their salary level. The differentials also allow the employer to reward certain long-term employees whose income levels demonstrate their value to the company. This selectivity is not permitted under a group DI plan, so salary continuation gives the employer more latitude to reward specific employees.

Salary continuation plans can be considered supplemental to group DI plans, which generally specify a maximum monthly benefit payable regardless of actual income and percentage guidelines. While this maximum is often adequate for lower and middle-income earners, the cap may be inadequate for highly compensated employees. For example, if the maximum is

$5,000 monthly, but an executive is earning $8,000 per month, this individual is penalized by the group policy's maximum. Salary continuation plans funded by DI insurance can be paid in addition to the group plan benefits and provide a benefit that is more closely related to actual income.

Paying the Premiums

As was true of executive bonus plans, if the employer pays the premiums, employees must pay current income taxes on any benefits received from a salary continuation plan. Still, this is preferable to receiving no income replacement at all. On the other hand, salary continuation plans may be set up so the employee pays all or part of the premium. If the employee pays the entire premium, all salary continuation benefits are received tax-free.

If the employee pays part of the premium, benefits attributable to the employee contribution are received tax-free and those attributable to the employer's contribution are taxed. For example, suppose the employer and the employee each pay 50% of the premium. The employee receives salary continuation benefits totaling $3,000 and pays current income taxes on only $1,500.

Plan Features

The disability income insurance used to fund salary continuation plans is written as an individual DI policy for each person covered. This means the benefits are probably more liberal than any group DI plan since group plans are generally more restrictive. Under the salary continuation plan, the definition of disability, the elimination and benefit periods, benefit amounts and other provisions are determined under the same guidelines as other individual policies.

However, the cost is less because the premium is discounted if the plan covers many employees. The employer is responsible for paying the premiums directly to the insurer even if the employee contributes to premium payment. The insurer saves administrative expense by using a “list billing” to bill for a single premium. The list shows each employee covered under the plan and the individual premium for each employee, along with a single total premium the employer pays on behalf of the employees.

A salary continuation plan funded with DI policies results in individual policies that employees take along when employment is terminated. However, the premium will be greater since the multiple-employee discounting is no longer available to that individual. Again, this is a trade-off against being unable to purchase any DI insurance because of deteriorating health or advanced age.

Employers sometimes think of salary continuation apart from disability income insurance

because such plans may be funded by any means the employer chooses. As an agent, you are in a position to point out that when the time comes, the money from other sources simply might not be available and the employer would be unable to pay salaries while employees are not working. With DI insurance, however, the funds are guaranteed to be available when needed.

Business Disability Coverages and the Agent

Throughout this chapter we have presented a number of scenarios that demonstrate why and how businesses and their employees benefit from various disability insurance coverages. But what about you, the agent? Why should you pursue this market?

First of all, it can be a lucrative source of insurance business. Some of the policy types we've discussed involve dollar amounts that translate to significant income for you. In addition, when you've convinced your prospects of certain needs, others follow almost automatically. For example, the business overhead expense policy is a short-term solution for a disabled business owner; the disability insurance funded buyout is a natural next purchase.

Second, fewer individual disability income policies are being sold today for two major reasons. The first is the glut of social insurance disability income benefits that has eliminated a large market segment that formerly represented a pool of prospects. The second is the growing number of group disability income plans employers’ make available to all of their employees. While group plans are subject to termination because of employee turnover, you'll find many people objecting to the individual policy on this basis and It can be a difficult objection to overcome. Rather than fight it, you can join it by becoming active in the group market yourself; the next chapter gets you started. And you can use the business coverages discussed here as an entree to the group DI market-or vice versa. Whichever approach you take, small and medium-sized businesses offer a staggering number of opportunities for you in the disability insurance field.

Chapter 5 Review Questions

1. A certain individual disability income policy pays a $20,000 monthly benefit. This insurance is (a BOE policy/professional DI coverage/key person insurance).

2. Which of the following is an expense that is typically not reimbursable under a business overhead expense policy?

a. Utilities such as electricity, gas, water.

b. Salary for a person temporarily replacing the disabled insured.

c. Rent for the business property.

d. Employee salaries.

3. An insureds BOE policy has a maximum monthly benefit of $6,000. During the first month after the elimination period, covered expenses total $6,200. Since this is a reimbursement policy, you know the policy will pay ($6,000/$6,200) for this month's expenses.

4. A certain BOE policy pays a partial benefit tied to the relationship of the insureds post disability earnings to pre-disability earnings. Under this particular arrangement, the benefit is not a true residual benefit, but a certain amount is paid if the insureds earnings are 50% or less than before the disability occurred. Assuming this is the case and the insureds policy pays a maximum monthly benefit of $4,000, what is the amount of the benefit she will receive for partial disability? ($4,000/$2,000/the same percentage as the percentage of lost income)

5. The claims-made malpractice liability rider attached to a BQE policy pays the premium for which of these during the insureds disability?

a. The claims-made policy.

b. The extended reporting period endorsement for the claims-made policy

c. Both of the above.

The policy only, the endorsement only, or both. depending on the insureds

wishes.

6. The benefit from a disability buyout policy is paid in what form? (A lump sum/Monthly benefits/either of the preceding depending on the insurer)

100

7. Max Wilson's disability buyout policy agrees to pay the full maximum benefit stipulated in the policy if a buyout is triggered. Which statement is correct?

a. Wilson's policy is an indemnity policy.

b. Wilson's policy is a reimbursement policy.

c. Not enough information is provided to determine which type of policy this is.

Assuming the person insured under a disability buyout policy is disabled as defined

in the policy, what triggers the buyout?

a. When the insured has been disabled for six continuous months, the buyout is riggered.

b. The buyout is triggered by the first day of total disability, but completing the buyout is delayed by six months to be certain the insured will not return to work.

c. Completion of the stipulated elimination period triggers the buyout.

d. The buyout is triggered by the execution of the buy-sell agreement at the request of the other non-disabled owner or owners.

9. An insured is disabled for five months. returns to work for one month, then suffers a recurrent disability. Under a disability buyout policy with a 12-month elimination

period, which statement is true?

a. A new 12-month elimination period begins.

b. The portion of the elimination period already fulfilled is taken into consideration, so only seven months remain in the elimination period.

The elimination period is waived, so the buyout will be triggered immediately if and when the insureds disability is diagnosed as permanent.

10. The benefit from a key person disability policy is paid to (the business/the insured/both the business and the insured).

101

A common method for determining the monthly benefit for a key person disability policy is which of these?

a. Establish a benefit equal to the key person's monthly income.

b. Establish a benefit equal to one-half the key person's monthly income.

c. Establish a benefit equal to twice the key person's monthly Income.

Establish a benefit equal to the key person's monthly income plus expenses that would be offset by that person's earnings if he or she were actively at work.

A personnel replacement rider attached to a key person disability policy pays expenses to replace the disabled key person on what basis? (indemnity/reimbursement/either indemnity or reimbursement at the insurer's option)

13. Which of these plans may be established on a selective basis, rather than covering every employee in a business?

a. Executive bonus Dl plans.

b. Salary continuation plans funded by DI insurance.

c. Both of the above.

d. Neither of the above.

14. When an insured employee leaves the employment, which of these plans would terminate at the same time? (executive bonus DI insurance/salary continuation funded by DI insurance/both plans/neither plan)

When is income taxable to the disabled insured under a salary continuation plan funded by disability insurance? (always/never/when the insured pays the premiums/when the business pays the premiums)

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Answers

professional DI coverage – the amount and the fact that this is an individual policy are the clues to these answers.
b is correct
$6,000 – the maximum; but the additional $200 may be paid during a month when expenses are lower or would be paid immediately if the insurer allows an elimination period “credit”
$4,000 – this is the method that pays the entire benefit if the insured earns no more that 50% of pre-disability earnings
b is correct
either of the preceding depending on the insurer
a is correct
c is correct
b is correct
the business
c is correct
reimbursement
c is correct
neither plan – both are written as individual DI policies that continue as long as the insured pays the premiums
when the business pays the premiums