It’s not easy to find an industry with more legal, binding, business partnerships than the practice of law. From teams of two to partnerships of hundreds, attorneys forge practice partnerships for all kinds of practical and rewarding reasons. Sharing the financial responsibility of a firm, growing the practice, and collaborating on cases are just a few of the key reasons that attorneys flock together. There’s strength in numbers.
But these partnerships also place the individual attorney at risk. I certainly don’t need to tell you just how often accidents or unforeseen illnesses arise; you see it every day. From personal injury claims, to defending insurance companies, to the dreaded wrongful death suits, and everything in between; by and large, attorneys have a bird’s eye view on just how impulsively… life happens.
To that end, you’ve undoubtedly protected yourself with insurance in the event of the death of your partner(s). Life insurance or buy-sell insurance policies are imperative. After all, the lost wages from the death of a partner alone would be financially devastating, to say nothing of the stress you’ll find yourself under if you need to be in a position to buy out their portion of the practice. (I’m assuming here that you don’t want their spouse or child to become your new business partner, thus mandating the buy-out). So, for argument’s sake, we’ll also assume that you have life insurance all locked up.
However, what would happen if one of your partners were to become disabled? A slip and fall, a stroke, an open sewer grate or thousands of other unforeseen circumstances could also deal you a tremendous financial blow. Life insurance policies will not protect you under these circumstances. Moreover, conventional disability insurance is liable to fall short of your required financial protection as well. However the likelihood of a partner becoming disabled is frankly much higher than the likelihood of death.
According to the Social Security Administration’s 2011 Fact Sheet, just over 1 in 4 of today’s 20-year-olds will become disabled before they retire. To illustrate, consider that, according to the Council for Disability Awareness (www.disabilitycanhappen.org), a typical female, age 35, 5’4”, 125 pounds, non-smoker, who works mostly in an office environment, with some outdoor physical responsibilities, has a 24% chance of becoming disabled for 3 months or longer during her working career. The odds are similar for men of the same age, with a 21% chance of becoming disabled with all things being equal. The chances of disability are multiplied exponentially if pre-existing medical conditions exist, if they’re not in good general health, and with age.
That’s essentially why Key Man Disability insurance was created. This type of coverage is designed for partnerships ranging from 2 individuals to mega-firms wherein the disability of any of its partners would result in hardship. Key Man Disability insurance, like general Key Man insurance, is purchased by the firm to cover your key people. In a law firm this would include the partners, but also could also be purchased to cover any employees who play an integral role in the firm’s operations. Indeed, Key Man Disability will protect the firm not only from financial losses due to one of its key people becoming disabled, but will also cover the firm until a replacement partner, attorney, paralegal, etc., can be found.
Like all insurance policies, there will be a lot of fine print, but the fine print in Key Man Disability insurance includes good news. Policies are custom designed for your firm’s specific needs, and they typically allow for two options for the firm. The first option would provide for a monthly payout. This would be a suitable option in the event that a partner had to undergo a lengthy recovery period from surgery, for example. Based on the income of the key person and the projected loss of earnings due to their disability, this monthly payment generally begins within three months of the disability. It will continue for the life of the policy, or until the key person is capable of once again performing in the same capacity as before the injury, illness or accident.
The second option for law firms filing a Key Man Disability claim would be a lump sum payout. While this takes longer to receive (typically, at least a year) the lump sum may be used to buy out the partner in the event that the partner or key man cannot return to work after a year. Money can also be allocated for the replacement and training of the new firm partner.
Both options can be used to offset a surge in one partner’s overhead as the result of another partner being incapable of paying their part during their disability. Similarly, both options will take into account the disabled key person’s contribution to the firm’s overall earnings, and the benefit will be provided accordingly.
Whether or not your firm needs Key Man Disability will be a decision that you’ll have to make on your own. If you’re unsure if whether this type of coverage is necessary for you and your partners, ask yourself some questions including: Would the disability of a partner result in your firm losing clients? How much of the firm’s revenue stems directly from the key person? Can the firm survive without that income?
Only you will know the answers to these questions. And it’s understandable if you are reluctant to pay for this type of policy. Most of us don’t like to think about the possibility of becoming disabled, nor do we think it will happen to us. Again, according to the Council for Disability Awareness, 64% of wage earners believe they have a 2% or less chance of being disabled for 3 months or more during their working career. Unfortunately, the actual odds for a worker entering the workforce today are about 30%, according to the Social Security Administration.
So our perceptions don’t necessarily match the facts. Yet, when it comes to law partnerships and practices, the disability of one of the key partners can be more devastating than in other industries, so Key Man Disability is certainly something worth considering. But be sure to talk with an agent about your specific concerns as these policies can and will be structured specifically to your needs.
About the Author: Steven Driss is President of Lifeline Employee Benefits in Tarzana, CA. Lifeline Employee Benefits was established in 1985 to help individuals and small businesses identify and purchase affordable health insurance, disability and group insurance. For additional information visit www.health-quotes.net or contact Steven directly at (818) 774-1003 or via email at firstname.lastname@example.org