critical illness insurance http://www.wisebread.com/taxonomy/term/8038/all en-US Business Succession Planning Part 3: Using Disability Insurance to Protect your Business Interest http://www.wisebread.com/business-succession-planning-part-3-using-disability-insurance-to-protect-your-business-interest <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/business-succession-planning-part-3-using-disability-insurance-to-protect-your-business-interest" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/business succession planning part 3.JPG" alt="hospital" title="hospital" class="imagecache imagecache-250w" width="250" height="151" /></a> </div> </div> </div> <p class="MsoPlainText"><span> </span><span>In my previous posts on this topic, I delved into the world of <a target="_blank" href="/business-succession-planning-part-1-what-a-shareholders-agreement-means-to-you">Buy-Sell Agreements</a>, and how to use <a target="_blank" href="/business-succession-planning-part-2-how-life-insurance-will-insure-the-life-of-your-business">Life Insurance</a> to fund these agreements and insure valuable assets like key employees. </span></p> <p class="MsoPlainText"><span>But there is a risk much more prevalent than death which also needs attention on the part of business owners and partners: the risk of Disability. </span></p> <p class="MsoPlainText"><span> </span></p> <p class="MsoPlainText"><span>In our working lives, we are considerably more likely to become ill or injured such that we cannot work than we are to get proverbially hit by a bus and killed. So it can be argued that even more important than the need to insure our lives is the need to insure our ability to work. </span></p> <p class="MsoPlainText"><span> </span></p> <p class="MsoPlainText"><span>There are a few ways in which business owners might consider covering off a Disability:</span></p> <p class="MsoPlainText"><span> </span></p> <h2><span>Buy-Sell Agreement Funding</span></h2> <h3><strong><span>Disability Insurance</span></strong></h3> <p class="MsoPlainText"><span>Bob, Joe, and Dave run a successful widget business together as partners. As such, they have done their due diligence in putting together a buy-sell agreement (also known as a shareholder's agreement) in order to protect both their respective shares of the business as well as the company as a whole. </span></p> <p class="MsoPlainText"><span>One of the clauses of the agreement surrounds disability. See, if Joe becomes disabled such that he can't do his job (which happens), then Bob and Dave have to pick up the slack. Joe might have his own <a target="_blank" href="/disability-insurance-payments-and-pitfalls">personal DI policy</a> which protects his salaried income. (However if he is paid with bonuses and dividends, he won't even qualify for a personal DI policy - that's another can of worms entirely). Either way, for a few years Bob &amp; Dave can probably keep the company above water for the time that Joe needs to recuperate. </span></p> <p class="MsoPlainText"><span>But if Joe's disability is long term or &quot;permanent&quot; in nature, the company has a whole new set of issues on its hands. Joe is no longer contributing to the success, growth, and maintenance of the company due to his disability. Should he rightfully continue to remain an owner, reaping the benefits of a business that is growing independent of his own efforts? Or is it time for Joe's share to be bought out so Bob &amp; Dave can move on with the business, or take on another partner? (Again, Joe should have a personal DI policy, so it's not like he is being left in the dust if he's planned properly for himself). </span></p> <p class="MsoPlainText"><span>Assuming the three of them agree, standard buy-sell agreements usually state that after a partner is disabled for &quot;x&quot; amount of time (usually a year), and/or if it is determined that the disability is permanent in nature, the disabled person's shares are to be purchased by the other owners or sold back to the company. </span></p> <p class="MsoPlainText"><span> </span></p> <p class="MsoPlainText"><span>Most companies and business owners don't have the money kicking around to pay for such things, especially as the company grows and prospers over time and the amount required to buy out an owner becomes substantial. There is however a solution: to fund the agreement with a special type of <strong>Buy-Sell Disability Insurance</strong>. </span></p> <p class="MsoPlainText"><span> </span></p> <p class="MsoPlainText"><span>The premise of Buy-Sell DI is to comply directly with the terms of the buy-sell agreement. <em>In fact, the insurance company may require a copy of the agreement to process the application</em>. </span></p> <p class="MsoPlainText"><span>One of the easiest ways to implement this arrangement is to have <strong>cross-owned policies</strong>. Bob &amp; Dave personally own a policy for Joe. Joe &amp; Dave own for Bob, and Bob &amp; Joe own one for Dave. It works best for partnerships of only two or three owners; more than three partners, and the cross-ownership strategy gets a little too complicated.</span></p> <p class="MsoPlainText"><span>Once Joe has been disabled for 1 year (for example), the agreement states that his share of the business is to be bought out either in a lump sum or over a period of 2 years. The DI policy is structured to pay Bob &amp; Dave exactly the money required to satisfy the terms of this agreement to the letter. </span></p> <p class="MsoPlainText"><span> </span></p> <p class="MsoPlainText"><span>You can also structure this policy so the company owns it and is the beneficiary of the cash to pay out Joe, however taxation issues become a little more prevalent in this case (depending on the corporate structure).</span></p> <p class="MsoPlainText">&nbsp;</p> <p class="MsoPlainText"><span> </span></p> <h3><strong><span>Critical Illness</span></strong></h3> <p class="MsoPlainText"><span>Critical Illness insurance (you can get the basics about it <a target="_blank" href="/critical-illness-insurance-for-wise-bloggers">here</a>) is another way to comply with the terms of a buy-sell agreement. CI usually pays out a lump sum of money in the event of a diagnosis of a critical illness. Since most buy-sell agreements stipulate a lump sum purchase of the disabled person's share of the business, this might be a good solution. It also usually costs less than corresponding DI policies, so is great for the budget-minded business owner. </span></p> <p class="MsoPlainText"><span>Another benefit is that qualifying for CI has nothing to do with income history; whereas buy-sell DI requires the business to have a proven financial track record before the insurance company will issue the policy. So a business in the early stages may find that CI is the only way to insure buy-sell agreements. </span></p> <p class="MsoPlainText"><span>However Buy-Sell CI has a significant downfall in comparison to it's DI counterpart: it only pays out on the diagnosis of a specific set of illnesses and injuries. If the buy-sell agreement is broader in scope to cover off any disability for any reason (which would make sense), then there may be cases in which the buy-sell agreement kicks into effect, but the insurance policy doesn't pay out the money to grease the transaction.</span></p> <p class="MsoPlainText">&nbsp;</p> <p class="MsoPlainText">&nbsp;</p> <p class="MsoPlainText"><span> </span></p> <p class="MsoPlainText"><span> </span></p> <p class="MsoPlainText"><span> </span></p> <p class="MsoPlainText"><span>In both cases, there are a number of snares and pitfalls that can be avoided with proper legal, tax, and financial planning. It is imperative that consultations with your team of financial professionals (lawyer, accountant, financial planner) should be arranged to make sure the agreements and corresponding policies are drafted to suit everybody's best interest. </span></p> <p class="MsoPlainText"><span> </span></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/nora-dunn">Nora Dunn</a> of <a href="http://www.wisebread.com/business-succession-planning-part-3-using-disability-insurance-to-protect-your-business-interest">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/business-succession-planning-part-1-what-a-shareholders-agreement-means-to-you">Business Succession Planning Part 1: What a Shareholder&#039;s Agreement Means to You</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/business-succession-planning-part-2-how-life-insurance-will-insure-the-life-of-your-business">Business Succession Planning Part 2: How Life Insurance will insure the Life of Your Business</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-5-biggest-mistakes-freelancers-make">The 5 Biggest Mistakes Freelancers Make</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-5-best-credit-cards-for-small-businesses">The 5 Best Credit Cards for Small Businesses</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/11-freelance-jobs-that-pay-surprisingly-well">11 Freelance Jobs That Pay Surprisingly Well</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Entrepreneurship Insurance business succession buy-sell agreement critical illness insurance disabilty insurance shareholder's agreement Fri, 15 Feb 2008 01:30:23 +0000 Nora Dunn 1801 at http://www.wisebread.com Credit Card Insurance? No Thanks. http://www.wisebread.com/credit-card-insurance-no-thanks <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/credit-card-insurance-no-thanks" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/credit_0.jpg" alt="credit cards" title="credit cards" class="imagecache imagecache-250w" width="250" height="250" /></a> </div> </div> </div> <div style="margin: 1em; float: right;"><script type="text/javascript"> digg_url = 'http://www.wisebread.com/credit-card-insurance-no-thanks'; </script> <script src="http://digg.com/tools/diggthis.js" type="text/javascript"></script></div> <p class="MsoPlainText"><span>So your <a title="Guide to Using Credit Cards Wisely" href="http://www.wisebread.com/credit-card-guide">credit card</a> company just called offering you balance protection insurance against <a title="I Lost My Job - Tips for the Recently Unemployed" href="http://www.wisebread.com/lost-my-job-tips-for-the-recently-laid-off">job loss</a>, disability, life, or critical illness. The cost will be just pennies, calculated monthly based on your outstanding balance. </span></p> <p class="MsoPlainText"><span>Do you take it? </span></p> <p class="MsoPlainText"><span>The question is: have you performed an insurance needs analysis, or will you just make the decision to take the insurance based on impulse and instinct? </span></p> <p class="MsoPlainText"><span> </span></p> <p class="MsoPlainText"><span>There are typically four different types of credit card insurance: </span></p> <ul> <li><span><strong>Involuntary Job Loss</strong>: This pays your monthly minimum payment for a specified period of time after you lose your job through downsizing or layoffs. </span></li> <li><span><strong>Disability</strong>: Like above, your monthly minimum payment is covered for a specified time period upon becoming disabled and unable to work. </span></li> <li><span><strong>Critical Illness</strong>: Similar to above.</span></li> <li><span><strong>Life or AD&amp;D</strong> (Accidental Death &amp; Dismemberment): If you die, your entire credit card balance will be paid. </span></li> </ul> <p class="MsoPlainText"><span> </span></p> <p class="MsoPlainText"><span>The cost may initially seem small at between $0.75 and $1.50 per $100 of outstanding credit card balance each month, but in the spirit of being frugal, is that money wisely spent? </span></p> <p class="MsoPlainText"><span>Consider the fact that with the exception of credit life protection, this insurance doesn't actually pay off your debt. It simply makes the minimum payments on your outstanding balance for the term of the contract. In fact, depending on the credit card and interest charges, you may sometimes find that the balance at the end of the contract is actually higher than when the claim occurred due to compounding interest. </span></p> <p class="MsoPlainText"><span>Are those minimum payments something that would cripple you financially in the event of an illness or job loss? The answer will be different for everybody - this is just food for thought. </span></p> <p class="MsoPlainText"><span> </span></p> <p class="MsoPlainText"><span>Similar to individual <a target="_blank" href="/critical-illness-insurance-for-wise-bloggers">Critical Illness</a>, Disability, or <a target="_blank" href="/choosing-life-insurance-term-or-permanent">Life Insurance</a> policies, there are a few things that bear consideration in order to make a sound decision:</span></p> <ul> <li><span><strong>What are the terms of the policy?</strong> (For example, what are the specific definitions under which the insurance company will pay)?</span></li> <li><span><strong>What coverage do you need?</strong> If you lose that income or become ill, will minimum payments on your credit cards be of benefit to you, or do you have other funds that will suit the purpose? </span></li> <li><span><strong>What coverage to you already have?</strong> There is no point in duplicating your insurance coverage if you already have a CI policy in place.</span></li> <li><span><strong>In the case of job loss insurance, what are the exact terms?</strong> You may be surprised at the restrictions of this initially appealing option.</span></li> <li><span><strong>Is it cost effective?</strong> As a case study, let's examine the life insurance as an example. On a $10,000 credit card balance, at $0.80 per $100 of outstanding balance, your monthly charge would be approximately $80/month. For $80/month, a 35year old non-smoking female in good health can purchase upwards of $500,000 of Term Life Insurance. </span></li> <li><span><strong>Can you cancel the policy, and under what terms?</strong> If you do decide to take it, make sure you keep all your documentation together so cancelling it when the time comes is easy.</span></li> <li><strong><span>Are you insurable? </span></strong><span>Many balance protection policies don't require any evidence of insurability to qualify. If you have medical issues that make you a higher risk such that individual policies would either be cost-prohibitive or unavailable to you, then maybe this is just the protection you need.</span></li> </ul> <p class="MsoPlainText"><span> <br /> On the flip side, one type of credit card insurance that you may not realize you might automatically have is travel insurance. Many credit cards feature automatic flight and travel coverage if you pay for a trip using that card. In fact, before you go out and purchase travel insurance, it bears calling your credit card company to find out the specific terms of their coverage. You may find that you can save a few extra bucks by not having to go out and get extra travel coverage! </span></p> <p class="MsoPlainText"><span> </span></p> <p class="MsoPlainText"><span>As with all insurance policies, take a good hard look at what you need, what you can afford, and whether the &quot;easy option&quot; being offered to you over the phone is going to be easy in the long run. </span></p><br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/nora-dunn">Nora Dunn</a> of <a href="http://www.wisebread.com/credit-card-insurance-no-thanks">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/everything-you-should-know-about-getting-a-credit-card-but-didn-t-have-a-clue-to-ask">Everything You Should Know About Getting a Credit Card but Didn’t Have a Clue to Ask</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-best-0-balance-transfer-credit-cards">The 5 Best 0% Balance Transfer Credit Cards</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-reasons-your-card-got-declined-and-how-to-fix-it">7 Reasons Your Card Got Declined (And How to Fix It)</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/top-5-travel-reward-credit-cards">5 Best Travel Reward Credit Cards</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-best-cash-back-credit-cards">5 Best Cash Back Credit Cards</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Credit Cards accidental death balance protection insurance credit card insurance critical illness insurance disability insurance job loss protection life insurance Mon, 22 Oct 2007 22:46:28 +0000 Nora Dunn 1314 at http://www.wisebread.com