10.5 Disability Income Special Uses
Business Overhead Expense: Designed to reimburse a business for its ongoing operating expenses if the owner becomes disabled. Covered expenses typically include items such as office rent, utilities, and employee wages. However, this type of policy does not provide income replacement for the owner; it is strictly intended to keep the business operational during the period of disability.
Key Employee Insurance: Provides financial support to a business when a critical employee becomes disabled. Benefits can be used to cover the costs of hiring a temporary replacement, training a new employee, or offsetting revenue losses resulting from the key employee's inability to perform their duties.
Buy-Sell Agreement or Disability Buyout: Provides a lump-sum benefit that allows a partnership or business to purchase the ownership interest of a principal who becomes totally disabled. In a cross-purchase plan, each partner individually purchases a disability policy on the other partners. In contrast, an entity plan involves the business itself purchasing a disability policy on each partner to fund the buyout.
Disability Reducing Term: Assists small businesses in meeting long-term financial obligations that require regular payments, such as loans or leases. While the monthly benefit amount remains constant, the total benefit period decreases over time in proportion to the reduction of the underlying debt.
Quiz
1. Which of the following is the primary purpose of Business Overhead Expense (BOE) insurance?
A. To replace the owner's personal income during disability
B. To reimburse the business for operating expenses during the owner's disability
C. To provide a lump-sum payment to buy out a disabled owner's interest
D. To cover the cost of hiring a new key employee
Correct Answer: B
Rationale: BOE insurance is designed to cover ongoing business expenses such as rent, utilities, and employee wages when the owner is disabled. It does not replace the owner's personal income.
2. Key Employee Insurance provides benefits to a business primarily to:
A. Replace the personal income of the key employee
B. Fund the buyout of a disabled partner's business interest
C. Offset costs associated with a key employee's disability, such as hiring and training replacements or covering lost revenue
D. Reduce the debt obligations of the business
Correct Answer: C
Rationale: Key Employee Insurance is intended to help a business maintain operations and manage revenue loss when a critical employee is unable to work. It does not pay the employee directly.
3. In a Disability Buyout plan, what is the main difference between a cross-purchase plan and an entity plan?
A. Cross-purchase plans provide benefits to the business; entity plans provide benefits to employees
B. Cross-purchase plans require each partner to buy insurance on the others; entity plans have the business purchase insurance on all partners
C. Entity plans pay only for long-term debts; cross-purchase plans pay for short-term debts
D. There is no difference; both are identical in structure
Correct Answer: B
Rationale: In a cross-purchase plan, each partner purchases a disability policy on each of the other partners. In an entity plan, the business itself purchases policies on all partners to fund the buyout.
4. Disability Reducing Term insurance is best suited for which type of business need?
A. Replacing a disabled owner's personal income
B. Paying ongoing operating expenses like rent and utilities
C. Meeting long-term financial obligations with regular payments, where coverage decreases as debt is repaid
D. Covering the training costs of a replacement key employee
Correct Answer: C
Rationale: Disability Reducing Term insurance helps businesses continue meeting scheduled payments (e.g., loans or leases). The benefit period declines as the underlying debt is paid down, while the monthly benefit remains constant.
5. Which of the following statements is true regarding these special-use disability income policies?
A. Business Overhead Expense policies replace the owner's personal income
B. Key Employee Insurance provides benefits directly to the disabled employee
C. Disability Buyout insurance provides a lump-sum payment to fund the purchase of a disabled owner's business interest
D. Disability Reducing Term insurance increases the monthly benefit as the business debt decreases
Correct Answer: C
Rationale: Disability Buyout insurance is specifically designed to provide a lump-sum benefit so a business or partners can buy out the interest of a totally disabled owner. BOE and Key Employee Insurance do not pay the owner or employee personally, and Disability Reducing Term maintains a constant monthly benefit.