BOE, LTD, or Key-Man for Small Biz Owner

[Justin Bilyj]

I have a client who has a 2 million dollar business and deducts a 60k salary a year. I will be meeting with him soon to present a disability plan for him. He recently bought out his partner, so he has sole ownership of the company.

In the case of a permanent disability what would make more sense to have, a BOE, a Ltd, or a Key-Man? I don't want to recommend redundant coverage.

He plays a huge part in the business, Sales, Planning, and also does manual labor for the business that he is in. So he is integral to the business's survival.

If he becomes permanently disabled, a major part of the business will depreciate because of his absence. So looking at this, what seems to be the best way to go to not only insuring his 60k income, but his money machine aka the business from going bust, a Ltd and a Key Man, maybe add the boe in there?

Appreciate any help!

 

[DHK]

If I were to recommend a "key man" for disability, I'd use a critical illness policy.

Insurance is many times more an 'art' than 'science'.

I would write out the options and have him rank them 1-4 as to what HE wants to accomplish. Then fulfill his request.

 

[moonlightandmargaritas]

Justin, how is he organized? C-corp, S or what...

 

[Justin Bilyj]

LLC I do believe. There are tax advantages to writing off the premium in the case of the Ccorp, not sure about the Scorp though. A.S.K. to G.E.T. , could you enlighten me Paul?

 

[dgoldenz]

If I were to recommend a "key man" for disability, I'd use a critical illness policy.

Why? A CI policy isn't going to pay him an income for the next 20+ years and won't cover the #1 cause of disability.

Sounds like he needs a disability policy for himself and a BOE policy for the business. If he is deducting $60k/year as a salary, the business is probably filed as a C-corp since an LLC or S-corp would pass through the income to him, while a C-corp allows him to keep the income inside the corporation as retained earnings.

If the business is highly profitable, he is going to want to take more income at some point and max out the DI coverage. Even though he is currently "only" making $60k, it sounds like the amount of DI he could qualify for at this time would leave him well underinsured compared to his "actual" income from the business.

 

[Justin Bilyj]

Why? A CI policy isn't going to pay him an income for the next 20+ years and won't cover the #1 cause of disability.

Sounds like he needs a disability policy for himself and a BOE policy for the business. If he is deducting $60k/year as a salary, the business is probably filed as a C-corp since an LLC or S-corp would pass through the income to him, while a C-corp allows him to keep the income inside the corporation as retained earnings.

If the business is highly profitable, he is going to want to take more income at some point and max out the DI coverage. Even though he is currently "only" making $60k, it sounds like the amount of DI he could qualify for at this time would leave him well underinsured compared to his "actual" income from the business.

That makes sense about the Ccorp. Should he "claim" more income to max our di or just get a key man on him to augment the di. A BOE will only handle about 1-3 years if I remember the quote correctly. How will the biz survive if he pays the overhead (not that many employees, one location) and just a personal ltd policy?

 

[DHK]

Why? A CI policy isn't going to pay him an income for the next 20+ years and won't cover the #1 cause of disability.

A "key man" policy is (to my understanding) a policy set up where the company is the owner, payor and beneficiary. Hence to cover a cash flow deficit on a "key man" who is disabled.

IMO, a company does NOT need "ongoing income" from a disabled key person, but a large lump sum of cash would be more appreciated.

An "executive bonus 162" policy would be owned by the individual and the same individual would be the beneficiary.

Unless there's a different definition and purpose of a "key man" policy that I don't understand...?

 

[Justin Bilyj]

Executive comp plan but its a di plan?

 

[DHK]

Executive BENEFIT plan.

You're still using the company "salary expense" provision (IRC Section 162) to provide a benefit.

In this case, it's for a DI policy instead of a cash accumulating life insurance policy.

Company pays "bonus" to executive.

Executive pays for DI policy using the funds "bonused" to him.

Executive pays taxes at ordinary income levels.

It's nothing special.
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http://finsecurity.com/finsecurity/pdfs/compliance/2b4-02.pdf

Just substitute a DI policy instead.
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Let me clarify my earlier post: A company that wants ongoing income from a disabled owner/executive should purchase BOE on that owner/executive. Not a DI policy that is individually underwritten for the insured's level of income. That level of benefit won't be THAT beneficial when a larger policy could've/should've been purchased.

Besides, what would the company use the proceeds for? Tax-deductible expenses! That's what BOE is for.

 

[dgoldenz]

I wasn't suggesting key man coverage since this sounded like a one-man business, but maybe I am making the wrong assumption. I still don't see how a CI policy works better than a DI policy here unless he has health issues.