As a business owner, debt can sometimes be your friend. In situations where that debt can’t be repaid due to sickness or injury of the business owner, it can become your worst enemy. Disability insurance for business loans is available to protect you and your business from this challenge.
Most business loans or leases can be indemnified in the event of a disability. These plans can protect you, the borrower, in the event you have been disabled and are not able to earn the money to repay your loan.
We normally recommend a sole practitioner or self-employed individual to have two main types of disability insurance: long term individual disability insurance and business overhead expense.
The first policy is designed to protect YOU, the business owner, from loss of personal income due to sickness or injury. The benefits can be used in any way that you might see fit, however, they are often used for personal expenses such as paying the mortgage, car payments, and health insurance premiums.
The second policy is designed to protect YOUR BUSINESS. Expenses such as payroll, leases, and other insurance can be covered by a properly designed business overhead expense policy.
You may want to consider purchasing disability insurance for business loans if:
a) you have business loans
and
b) you do not have enough business overhead expense disability insurance.
How Does Disability Insurance for Business Loans Work?
When a bank lends money to a business, often the lender requires that the loan is covered should the business owner die. This is a relatively simple situation that can be solved with term life insurance.
But what if the business owner becomes disabled, and is unable to work and/or grow the business to repay the loan?
The first line of defense of your business is your business overhead expense policy, detailed above. Unfortunately, most BOE plans offer benefit periods that are too short to satisfy the loan repayment schedule and sometimes don’t cover loan repayment.
The next step is to tap your disability insurance for business loans policy, sometimes called loan indemnification disability insurance. This type of disability insurance is built specifically to repay an existing loan balance, should the borrower become sick or hurt and unable to work.
Even if the credit institution or bank doesn’t require this type of coverage, a savvy business owner will seek it out, knowing that their inability to generate revenue for the business is not a reason for the loan to go unpaid.
Types of Business Loans
Business loans can be structured in a number of ways including:
- SBA Loan
- Working Capital
- Start-up Loans (including franchises)
- Business Acquisitions
- Equipment or Construction Financing
Disability insurance for business loans normally have a goal of paying the lender based on the loan agreement. Benefits are designed to cover 100% of the monthly payment or as a lump sum. These policies can also be used to help satisfy the lender’s requirements to allow for quick closing.
General Overview
Disability insurance for business loans typically have an “own occupation” definition of disability.
Policy terms (how long the policy will last without being renewed) are typically 1 to 5 years.
Benefit Periods for monthly benefits are available for 12, 24, 36, 48, 60, 72, 84 & 120 months.
Elimination periods for monthly benefits are available for 30, 60, 90, 120, 180, 365 days.
Minimum monthly benefits start at $1,000 per month.
Maximum monthly benefits typically cap out at $200,000 or more, not to exceed the actual monthly loan/lease payment.
A medical exam is required.
Optional Benefits
In addition to the base benefits offered by disability insurance for business loans policy, some of these products offer additional benefits that may be purchased at the time of application.
Residual Monthly Disability
Sometimes, a sickness or injury does not cause a total disability but instead prevents you from taking on a full workload. This type of disability can limit your income, even though you may remain at work.
This benefit is similar to the residual disability riders that you may find on a traditional disability insurance policy. After suffering a loss of income of more than 15%, a residual rider will kick in and begin to pay a portion of the monthly benefit. Should your income be reduced by over 80% due to sickness or injury, the full monthly benefit would be payable.
Flex Benefit for Variable Interest Loans
If you have a loan that is linked to a variable interest rate, your initial benefit amount might not be sufficient to repay your monthly loan obligation. A flex benefit rider can help mitigate this issue by allowing the monthly benefit to increase up to 120%
Real-life Examples
Here are some sample cases from one of our carriers:
Take the case of …
An entertainer has agreed to lease a private jet for 12 months. This provides him with the ability to do his live concert tour with the most convenience. The leasing company realized that it would be prudent to require life and disability insurance to indemnify this lease. If he could not perform then he would not have the money to pay for the lease. The lease was for $120,000 per month for 12 months.
Take the case of …
A radiologist was purchasing a new MRI machine. The payment on the loan was $23,000 per month. If the doctor were to become disabled and not be able to schedule patients then the entire purchase would be in jeopardy.
Summary
Self-employed individuals have unique insurance needs. Business owner disability insurance can be as simple as purchasing individual long term disability insurance to complex layering of coverages that includes business overhead expense, disability buy out, and loan indemnification.
Not all businesses need disability insurance for business loans. If your business doesn’t have debt, then this type of coverage can be ignored. However, if your business is capital intensive and requires you, the business owner, to be successful, then purchasing this type of disability insurance is critical.
Contact us today for a confidential discussion of your needs. Our toll free number is 888-636-2310. Alternatively, simply fill out the quote form on the left and we’ll be in touch.
