I’d like to tell a quick story about a meeting I had with a client recently that is a one year old professional services firm hiring its 4th and 5th employees.
Initially I reviewed their buy sell agreement and an informal valuation of a new business . Life insurance was the big topic of conversation between the two owners, but after I had a chance to review financials and look at owners’ income, I brought up Disability Insurance. Both owners could not quite wrap their brain around the issue because they had it paid for in their prior place of employment.
The two partners had been working together in another company for the last 10 years and when they started this venture they were allowed to take all their clients with them. They had been through the trenches together and planned to stand by each other through thick and thin, but the idea of giving up 50% of the profit to a person who was no longer able to earn for the entity bothered both of them.
The question that all three of us finally came to was this, “ Is there any easy way to make the decision about when one partner could stop supporting the other if he could not work anymore?”
The answer was that the decision to cut somebody off is never easy, but the burden of it can be reduced if they know the other partner has income separate from the business. At that point the decision to purchase disability coverage became an essential element of the risk management plan for their business.
Further information regarding where Disability Insurance fits in a business owner’s personal and business risk management plans can be found here: Disability Insurance Business and Personal. If you are interested in an evaluation of your situation, please contact me.
Paul J. Phelan, CFP®
301-948-5800 x 117