Business Uses Of Disability Income Insurance
Welcome, everyone. My name is Tan and I am an independent CERTIFIED FINANCIAL PLANNER™ practitioner. Today, I want to share with you the business uses of disability income insurance.
Group Disability Insurance
- The policy can be designed in 3 different ways.
1. The employer pays the premiums, the employee receives the benefits, benefits are taxed to the employee and tax-deductible to the employer.
2. The employee pays the premiums, the employee receives the benefits, the benefits are tax-free to the employee and is not tax deductible to the employer.
3. Employer and employee pay the premiums, the employee receives the benefits, pro-rata rule applies.
Business Overhead
- The company pays the premiums, the company receives the benefits, the benefits are taxed and premiums are tax-deductible (it’s like a wash), which means the company deducts the premiums as a business expense and the benefits are taxable income to the company.
Disability buyout or buy-sell agreements
- This type of policy can be arranged in a couple of ways.
- For example, the business pays the premiums, the business receives the benefits so it can give it to the disabled owners in exchange for their share of the business, the premiums are not tax deductible.
- This is how it works in real life. You and I are surgeons and we built an $8 million medical practice. If you hurt your hand from an accident, you cannot become a surgeon anymore. The insurance company will give the business $4 million so the business can give it to you, in exchange for your 50% share of the business. You walk away with $4 million for building the practice and I own 100% of the business.
Entity Purchase Plan
- The business purchases the disabled owner shares in the company.
- The company pays premiums for the policy and is its beneficiary.
- There are special rules apply to partnerships and S corporations.
Key Person Disability Insurance
- Key person disability insurance is a plan to insure a key employee for the benefits of the key employee or for the business. Who will receive the benefits depends on how the plan is structured.
- The employer pays the premiums on the insurance policy.
- The key employee is the insured.
- Premiums paid by the employer is not taxable to the key employee.
- If the employee is the beneficiary, the premium payments are tax deductible by the employer, the disability benefits are taxable to the employee.
- If the employer is the beneficiary, premiums are not tax deductible, the disability benefits are tax-free to the employer.
Please remember to always talk to a professional before making a financial decision because tax law changes, your situation might be different, and there are special rules.
Happy planning. This is Tan. Your trusted advisor.
This material is for educational use only and does not constitute tax, legal, or investment advice. Information may be changed or updated without notice. Consult with a licensed professional regarding your personal circumstances.
Please do not excerpt or copy this information without prior consent from TAN Wealth Management.