10.3 Business Disability (Key Person, Buy-Sell, BOE)

Disability Coverage Inside a Business

Individual DI replaces a worker's paycheck. Businesses face three distinct disability exposures, and the national exam expects you to match each problem to the correct product: the loss of a vital employee (Key Person DI), the inability to transfer ownership when an owner is disabled (Disability Buy-Sell), and the continued overhead expenses of a disabled owner's office (Business Overhead Expense, or BOE).

Key Person (Key Employee) Disability

A key person is an employee whose skills, relationships, or knowledge are critical to the firm's profitability - a top salesperson, a lead engineer, a founder. If that person becomes disabled, the company suffers lost revenue and the cost of recruiting and training a replacement.

• Owner / premium payer / beneficiary: the business.
• Insured: the key employee (with consent).
• Benefit use: offsets lost profits and the expense of finding/training a replacement. Often paid as a lump sum or a limited monthly benefit (commonly up to 1-2 years) after a longer elimination period.
• Insurable interest: the business must demonstrate a genuine financial interest in the key person at the time of application.

Disability Buy-Sell

A buy-sell agreement is a contract among business owners requiring the firm or the surviving owners to purchase a departing owner's interest upon a triggering event. Life insurance funds the death trigger; disability buy-sell insurance funds the disability trigger. Without it, a partnership could be forced to keep a permanently disabled owner on the books, draining cash and creating governance deadlock.

Distinctive features the exam tests:

• Long elimination period. Disability buy-sell typically uses a long waiting period (commonly 12-24 months) to confirm the disability is permanent before triggering a buyout - you do not want to buy out an owner who recovers in three months.
• Funding method. The benefit may be paid as a lump sum or in installments to fund the purchase price set in the buy-sell agreement.
• Two structures. Entity (stock redemption) - the business owns the policies and buys the interest. Cross-purchase - each owner owns a policy on the others and buys directly.

Business Overhead Expense (BOE)

BOE insurance is designed for small-business owners and professionals (doctors, dentists, attorneys, accountants) whose practice has ongoing fixed expenses that continue even while the owner is disabled. It does not replace the owner's salary - that is what personal DI does. Instead, BOE reimburses deductible business expenses so the practice can stay open until the owner recovers or sells.

Covered vs. Not Covered Under BOE

Key BOE characteristics: a short elimination period (often 30-90 days, because overhead bills come due quickly), a short benefit period (typically 1-2 years - enough to recover or sell the practice), and reimbursement up to actual expenses subjected to a monthly maximum.

Worked Example - BOE Reimbursement

A dentist's BOE policy has a $12,000 monthly maximum. In a claim month the practice incurs $9,500 of covered overhead. BOE reimburses the actual covered expense of $9,500, not the full $12,000 maximum. If overhead instead totaled $14,000, reimbursement is capped at the $12,000 monthly maximum. Unused monthly amounts in many contracts can carry forward to later months when expenses exceed the cap.

Exam Tip: BOE pays the practice's bills (expense reimbursement, short benefit period); personal DI pays the owner's living expenses (income replacement, long benefit period). Disability buy-sell funds a purchase of ownership after a LONG elimination period.

Key Person and Disability Buy-Sell in Depth

Business disability comes in three distinct products the exam keeps separate by purpose. Key person disability income protects the business itself against the loss of a vital employee, paying the company a benefit to cover lost revenue and the cost of hiring and training a replacement; the business owns the policy, pays the premium with after-tax dollars, and the benefit is received income-tax-free.

Business overhead expense (BOE) reimburses the actual fixed business expenses, such as rent, utilities, and staff salaries, while the owner is disabled, with a short benefit period of one to two years and a monthly cap; BOE premiums are tax-deductible and the reimbursements are taxable, offsetting the deducted expenses.

Disability buy-sell funds the purchase of a disabled owner's interest under a buy-sell agreement. It uses a long elimination period, often 12 to 24 months, because partners want to be sure a disability is permanent before triggering a buyout, and the benefit can be paid as a lump sum or installments to fund the agreed price. Work a contrast: if a partner is disabled for four months, a buy-sell policy with an 18-month elimination period pays nothing and the partnership simply waits, whereas the partner's personal DI would already be paying living expenses and a BOE policy would be covering the firm's overhead.

The exam tests this by asking which policy responds in a given month, and the answer follows directly from each product's purpose and elimination period. Premiums for personal DI paid by the individual produce tax-free benefits, the recurring theme that who pays and how the premium is taxed determines whether the benefit is taxable.