Planning For The Worst: A Disability
Primer for Sole Proprietors
by Kenneth Eaton, CFA, CFP
done some personal planning. You may have a will and a revocable trust.
You may also have durable powers of attorney that nominate an agent to
make personal financial and health care decisions for you if you are
incapacitated, and you probably have life insurance.
But have you really thought about how your business would be affected if you were suddenly unable to work? What do you really need to make sure that your business doesn’t fail even if you are only gone for a short period of time?
No matter the size of your business, you should start with a written plan. There are a variety of insurance products and legal tools available to help you mitigate the problems associated with your incapacity, but, before you call an agent or attorney, it helps to play out the scenario in your head and decide what you really want to happen.
If you are already able to take regular vacations, your business can probably survive your hospitalization for a period of two weeks or so. You probably have to do certain things to prepare for it just like you do when you go on vacation, like put someone in charge, notify your most important customers that you will be gone, and make arrangements to have the bills paid. Unfortunately, you cannot do those things in advance if you are in a car accident or have a heart attack. To prevent chaos while you are gone, you should create an easily accessible “emergency” file. These detailed instructions should include a list of people that should be notified that you are incapacitated, and the name of the person that has access to the business checkbook, if it is someone outside of your office, so that bills can be paid in your absence. You should also specify who should make what decisions in your absence. Review your emergency plans with trusted people and show them where you keep your most important files, By establishing your procedures in advance, you will be more likely to return to an organized workplace when you recover.
Regardless of the length of your absence, you should decide who you trust to manage your business affairs in your absence. If you have a durable power of attorney, you have probably already given the person that you nominated to care for your personal affairs the authority to make your business decisions. Normally, that person is a spouse or other family member. That may be fine, or you may want to nominate someone else who is more familiar with your business and who has the time to devote to it.
Unfortunately, many disabilities are more severe, and it may be months or years before your return to work, if ever. If your business could not survive your absence for an extended period, you may want to buy Business Overhead Insurance. In contrast to a long-term disability policy, a Business Overhead Insurance policy will furnish the money that you need to pay rent, salaries, and other business expenses while you are disabled. It also typically lasts only about two years rater than until your normal retirement age. That should give your agent the ability to retain key employees while you recover, or to sublet your office space and sell or wind down your business if you cannot return to work.
Finally, you should plan for the possibility that you will never return to work. The ability to sell your business may alleviate some of the burden on your finances, but, even so, you will probably still need some additional income. In that case, there is no substitute for long-term disability insurance. Because insurance companies want you to have some incentive to return to work, you cannot find a policy that will replace 100 percent of your lost wages. If you purchase and pay for the policy properly, however, it may replace most of your take-home pay.
As with most all issues in business, proper planning prevents poor performance when you prepare for catastrophic situations. If you take the time to plan now, you could save your business in the future.
Kenneth Eaton is Principal, Stepp & Rothwell, Inc.
P | 913.345.4800
E | ken@steppandrothwell.com