Key Person & Business Owner Disability Planning

October 2012

Business revenue – and business valuation – can be adversely affected by the disability of a key person or owner.  Of course, this economic impact can extend to the disabled person and their family.

Acknowledging these realities, smart business people sometimes purchase Business Overhead Expense (BOE) disability insurance, Buy-Sell disability insurance, and individual disability insurance.  These products provide money in the following ways:

Business Overhead Expense (BOE) disability insurance –  In recognition that revenues may suffer due to the disability of a key person,  BOE provides a benefit to pay covered business expenses after an elimination period (deductible satisfied by time/days);

Buy-sell disability insurance – Most owners of smaller businesses count on their business income and value to fund their own —and their families’ — financial needs, including retirement. However, an extended disability will very likely make it impossible for an owner to sell his or her business at anything approaching its pre-disability value.  A buy-sell agreement funded by buy-sell disability insurance puts in place the mechanism to provide liquid funds for the new owner to buy out the disabled owner.

Personal disability income insurance – When an insured is sick or hurt and unable to work, disability insurance replaces lost earned income.  Executive/key person carve-out disability insurance puts in place individual contracts first, which are then supplemented by a group plan, maximizing after-tax disability income.


Many disability insurance policies have significantly-reduced benefits for disabilities arising at or after age 60.  For example, even a top-shelf individual disability contract, purchased with a lifetime benefit period, will only pay a 2- or 3-year maximum benefit if a disability occurs at or after age 60.  Businesses and their advisors should review all disability contracts in order to understand at exactly what age maximum benefits wane — and in that context, to consider the relative merits of disability insurance and long term care insurance (LTCI).  Although the covered risks and benefit triggers of disability income (DI) and LTCI are different, it may make sense to reposition DI premium to a cash LTCI policy or a reimbursement LTCI policy at around age 60.

While disability insurances can protect businesses against revenue declines and individuals against lost earned income, there is a glaring financial loss not addressed even by comprehensive disability planning:  if the disability involves severe cognitive impairment, or the need for help with daily activities such as dressing and bathing, significant long term care expenses may be incurred.  The costs of professional, long term, extended care are not covered by either health or disability insurance. That being the case, during the process of planning disability coverage, business owners interested in protecting their finances against all types of infirmities should also consider long term care insurance.