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Business Reducing Term Insurance

Consider the following scenarios:

1. Problem: You, as a small business owner, borrow money for expansion. As long as you can run the business, the loan will be repaid from earnings on the investment. If you die, life insurance will pay. But if you are totally disabled, both business and personal assets could be lost! 2. Problem: You may offer a five year guaranteed employment contract-guaranteed whether the employee dies or is totally disabled. Death? Life insurance. Disability? You could be facing a large loss. How do you pay for both the disabled person and the replacement? 3. Problem: You purchase a business by putting $200,000 down, with $300,000 payable to the seller over a period of 6 years. While you are able to run the firm, you can pay the seller from business revenues and receive a salary. Life insurance guarantees the obligation in case of death. But what if you are totally disabled?

Best of all, this contract is in addition to any personal disability insurance you may already have or may choose to purchase in the future. Through reducing term you can insure against a disability preventing you from meeting such fixed payment obligations as:

  • Salary contract guarantees
  • Contract performance guarantees
  • The funding of medium term loans dependent upon the business talents of a key individual for their repayment
  • Purchase agreements

How much of the obligation will be funded by Reducing Term Insurance?

If you are funding a loan obligation, Guardian will insure up to 100% of the monthly loan payments (principal and interest) where the obligation rests with a single principal.

If the insurance covers employment or performance contracts, the benefits would be received by the employer on a tax exempt basis and paid out on a tax deductible basis. Up to 100% can be covered for any fixed payment obligation. See tax info below.

The maximum monthly benefit is usually $10,000.

The premiums for business reducing term insurance are not deductible as a necessary business expense. Benefits are paid to a designated loss payee, so they are not taxable to the business. Premiums
Paid by
Paid to
Policy Owner Tax Treatment
Premiums Benefits
Business or
Loss Payee Business or
(IRC Sec. 265)
Tax free
(IRC Sec. 104)

Key Difference between Reducing Term Life and DI

Business Reducing Term disability only reduces by the benefit period. The face amount of the coverage never changes, just the possible amount of months that benefits could be paid out. Life insurance reduces the face amount of coverage over time.

Policy Features

  1. Period of Coverage - Any number of years from five to thirty (but coverage cannot extend beyond age 60). The term period will usually be the same as the obligation being insured.
  2. Elimination Period - One, two, three or six months, or one year. No benefits will be paid during the elimination period at the beginning of each period of total disability.
  3. Interrupted Elimination Period - If the elimination period is to months or more and you make an unsuccessful attempt to get back to work before the two months are up, the elimination period will not begin all over again if the unsuccessful attempt to go back to work lasts no more than half as long as the chosen elimination period. Instead, the two periods of disability, even if they have different causes, will be combined to determine when your benefits begin.
  4. Benefit Period - From the end of the elimination period until the end of the period of coverage (or prior recovery from total disability). The minimum term period is 12 months during the last year of coverage. If you are disabled and recover, the unused benefit term is still available.
  5. Waiver of Elimination Period - There is no elimination period for a recurrent disability within five years after recovery if: a) your prior total disability lasted for at least six months, and b) you received total disability benefits for at least one day. In such cases, this means first day coverage for all periods of total disability beginning after recovery, regardless of cause, for five years.
  6. Definition of Total Disability - Total disability means that you are unable to perform all the substantial and material duties of your occupation or profession and are not actually working at any occupation or profession.
  • The policy is not available in Montana, North Carolina, South Carolina and Virginia.
  • You must be under the care of a physician to receive benefits for disability.
  • This web page gives only a partial description of the terms and provisions of the policy and does modify the provisions of any policy. Your Guardian associate will be happy to review the full provisions, definitions and other details with you.

Opes One Advisors