I have a client who needs disability insurance for an acquisition loan. What are their options?
The first strategy is the most common and most affordable but offers the least amount of protection. This would be with a Business Overhead Expense policy which pays to cover all overhead expenses—staff salaries, mortgage/rent, utilities, benefits, and loans. These plans pay for 12-24 months after a waiting period of 30-90 days. Typically, the cap for these policies is $50k/month. So, if there’s a disability in the first year, and there’s only a 12-month benefit, then the disabled owner will likely have to hand over their collateral assets because the protection was not enough. People who just want to check a box can easily fall into this trap.
The second strategy is to use a more specialized Loan Indemnity solution, which assigns the benefits directly to the lender. We basically match the loan agreement to pay the amount and duration exactly stipulated in the loan, so it amortizes on schedule. This solution is typically a little more expensive since it’s designed to cover the entire loan amount. However, it does not pay any other benefits (all other overhead expenses are uncovered).
We recommend getting both BOE and Loan Indemnity so that all business obligations are covered. Furthermore, we recommend Individual DI to protect the owner’s family, too. Some people are fine using their IDI as their loan funding mechanism, but that’s not a great idea since that is also their lifeline to protect their normal lifestyle expenses.