Disability insurance for business owners has a lot of challenges. Solving those challenges takes expert, unbiased advice that we can provide. If you own a business, then having disability insurance is extremely important.
Imagine not being able to work. One can easily name hundreds of illnesses or accidents that can keep you from working for an extended period of time. The Council for Disability Awareness (CDA) has data showing that 25% of today’s 20 year-olds will become disabled before they retire. The average long-term disability lasts almost three years (31-34 months).
Would your business survive?
Only you, the person who owns the business, can answer that question.
A Personal Story
Most of this blog is written for informational purposes; with the goal of earning your trust. If I do a good job, you’ll submit your information and eventually buy a disability policy from my agency. That being said, even if you choose not to purchase your insurance from us, please still buy it. Life and disability insurance are the cornerstone policies in protecting your income, and ultimately, you and your family’s lifestyle.
If you’re reading this then you’re likely a business owner, like me. I’ve been self-employed since 2010 and am the sole breadwinner for my family since 2012. Like most self-employed people,I have substantial life insurance, should I die prematurely.
I also have disability insurance.
As someone who was born in the 70’s, my biggest financial risk is still a loss of earning power. That loss can occur two ways:
I am unable to work.
Both of these situations would be financially catastrophic, were I uninsured. Life insurance, for the most part, is a pretty simple problem to solve the death issue. After all, I’m no longer here so we can just compute how much life insurance I need and my family should have adequate coverage.
Protecting against a disability is another creature altogether.
First off, I am still alive. That in of itself incurs additional costs as another non-earning member of my family. A lot of disabilities that prevent you from working are not conditions that most of the population would perceive as being disabled. Being in a wheelchair or losing limbs is what many envision when they hear the word disability. While those circumstances are certainly a real cause of disability, many people will go on to claim for health conditions such as depression, arthritis, or heart/cancer issues.
In fact, according to a CDA study done in 2013, the leading causes of new disability insurance claims in 2012 were:
- Musculoskeletal/connective tissues disorders
- Injuries and poisoning
- Metal disorders
- Cardiovascular/circulatory disorders
It would have been nice for the Council of Disability Awareness to detail the percentage split between injury and poisoning for number 3… I mean… poisoning? Really?!
The bottom line is this: you can become disabled for any number of reasons. If you were to become disabled, how would that affect your personal lifestyle or your business?
Disability Insurance for Business Owners
When it comes to incurring a disability, what makes a business owner different from a regular employee?
For one, the business owner not only has a responsibility to his or her family but also to the business itself. Businesses have partners, employees, and overhead. These are all items that can cause major financial losses should the business owner be unable to participate in ownership activities for an extended period of time.
An employee, at least one from a large company, likely has group coverage through his or her employer. In addition, employees in a business are typically going to have much lower salaries than a successful business owner. State and federal programs such as social security disability might be enough to weather a difficult storm for those particular individuals.
So, what does a business owner do to protect their own interests in addition to the interests of their business partners, employees, and ultimately, the business itself?
They purchase disability insurance for business owners.
The first line of defense is your “outwork”. An outwork is a fortification or system of defense that it in front of your main defensive protection.
Speaking to disability insurance for business owners, your “outwork” is a personal disability insurance policy. If you had to stop working tomorrow due to illness or injury; the most important item on your financial checklist is your income. That is, keeping the money coming in.
Business owners have quite a few benefits afforded to them in purchasing individual disability insurance policy, both from a benefit amount and a premium cost standpoint.
Increased Benefit Amounts
If you’re a business owner, it is likely that you try to save money in any way possible. That process includes not paying more than you should have to in federal and state taxes.
While this motivation is understandable; you’ve definitely seen the downsides to this reporting strategy, even if you’ve only been in business for a few short years.
One area of concern is financing. If you’re looking to secure a loan, mortgage, or any other debt, then having a bunch of write-offs doesn’t really serve your objective well. In most instances- showing less income will reduce or disallow your qualification for much-needed capital.
Disability insurance for business owners is no different. You’re only going to be insured for what you’re actually making; not your gross income. This can present a challenge for businesses that have major write-offs, or that have “creative” accountants.
The good news is this: As a business owner, you may be entitled to a larger benefit amount than for which you might actually qualify. Several disability insurance companies have determined that most business owners use deductions and business expenses to their advantage, and thus have more income than what actually shows up on their tax returns. To compensate these potential policy owners, some disability insurance companies will provide a credit, in some cases as high as 20%, to your declared income which allows you to qualify for more benefits than you would otherwise be entitled to.
This is extremely important to businesses with large amounts of equipment or those that deal largely in physical cash. If you’re in this situation, make sure that you understand that some carriers will give you higher benefits for being a self-employed business owner than if you were a regular employee.
Better Occupational Class
Your occupation class dictates your disability insurance premiums and the benefits for which you’ll qualify.
Disability insurance for business owners can sometimes penalize for items such as working from home or not having any employees. New or start-up companies can also find difficulty in securing a disability insurance policy.
The good news is this: some disability insurance for business owners will offer an “occupational upgrade” which can allow the business owner to qualify for a higher occupation class than the one which he or she might otherwise be entitled to.
This feature will allow for lower premiums for similar benefits versus someone doing your identical job in an “employee” setting. It may also allow for added benefits such as a longer benefit length or additional riders that were unavailable for purchase at the lower occupation class.
It’s good to be king (or queen).
Protecting Your Partners
If you are a sole proprietor and likely will never take on any additional business interests, then this section is not for you so skip to the next section of this page or fill out the quote form on the left and we’ll be in touch.
Alternatively, if in the title “disability insurance for business owners” you recognize the plural of the word “owner”, then you’re going to want to read the article.
Relying on someone else to help you generate income is stressful and requires an enormous amount of trust. Even if you have that unconditional trust from your business partners, if you were unable to work for an extended period of time due to sickness or injury, then all of you would suffer financially.
Thankfully, there is a number of business owner disability insurance policies designed specifically to mitigate that risk. The disability risk in this context normally has two outcomes: a partner or equity shareholder needs to be bought out due to disability, or the company needs to replace a key employee when they are no longer able to work due to sickness or injury.
Disability Buy-Out Insurance
As simple as it gets, disability buy-out insurance will pay your partners or your company (depending on the policy structure) a lump sum or limited annual payout for your share of the company. This policy creates the capital for the remaining business owners or the company itself to purchase the interest of the now-disabled owner.
Since a buy-out is normally large and payable over an extremely short frequency; it does have some restrictions that are not normally applicable to a traditional disability insurance policy.
The elimination period is going to be much longer than a traditional disability insurance policy. In a typical personal DI policy, the average elimination period is 90 days. For disability buy-out, the normal elimination period is one year, and in some cases may be 18 months or even two years.
Also, while own-occupation is widely available; trying to claim on a disability buy-out policy with a residual claim is unlikely. A residual disability is one that does not completely prevent you from doing your job but one that does reduce your income, time, or duties by a certain percentage, normally 15%-20%.
All that being said; a disability buy-out policy is one of the most important types of disability insurance a business owner can have. Without having this valuable protection, a buy-sell agreement might create a huge expense to the business should the remaining owners need to purchase the business interests of a now-disabled colleague. Having a disability buy-out policy can help to prevent a difficult financial situation for any business that has multiple owners involved.
Key Employee Disability Insurance
You may have someone in your organization that is responsible for a substantial portion of your revenue.
Call them what you will: rainmaker, rock star, or just top performer… this individual is essential to the success of your business.
This person is not, however, the owner of your business. Normally a “key” person does not own more than 50% of the business and might not even have any equity in the business at all. The most important characteristic of a key person is that they are critical to the livelihood of the business.
Disability insurance for business owners comes in many different forms. Key Employee Disability insurance is also known as Key Person Replacement insurance.
Like disability buy-sell; Key Person Replacement insurance is available in a variety of formats.
Should the key employee become disabled due to sickness or injury, then the policy will be triggered after satisfying its elimination period. These policies can normally be paid in monthly benefits or in a lump sum- left to the discretion of the business when they apply for said policy.
These policies are for the benefit of your business. If a benefit is triggered through the loss of your key employee, then the business becomes the beneficiary of any and all benefits paid. This gives your business valuable resources and time to be able to conduct a replacement search and maintain revenue through a difficult transition period.
If you have a key employee, whether an equity owner or just a top performer, then having key person disability insurance is imperative.
Looking at your business risks and using disability insurance for business owners to protect against those risks is crucial. Making sure that you’re insulated from losing a key person to disability is certainly one of those layers of protection.
Protecting Your Business
After making sure that your personal finances are protected and that your business interests are secure; the next step is looking at protecting the business itself.
Many business owners don’t realize that a number of their business-related costs can be covered by disability insurance. Having a policy that can keep your business operating (should you lose the opportunity to run your business by becoming disabled) is important.
It has been said before, but disability insurance for business owners comes in many forms. One of the most important policies that a business owner can purchase is known as business overhead expense or BOE.
Business Overhead Expense Insurance
Having business overhead expense coverage is crucial to any business that has overhead and does not have recurring revenue without the principal (typically the owner) being active in the business.
Those that decide to buy Business Overhead Expense insurance do so for several reasons. Most importantly, they do so to provide the business with the income necessary to maintain operations during a period of time when the owner is not able to work due to sickness or injury.
Business Overhead Expense reimburses a business owner for business expenses incurred during the owner’s disability. The benefits are based on the actual, qualifying expenses of the business itself.
These policy benefits vary by company but up to $100,000 a month is available. The actual amount will be calculated based on the business expenses. Most businesses can qualify, however, benefit limits will apply depending on the nature of the situation.
A myriad of expense may be covered by a business overhead expense policy. With all of the policies that cover disability insurance for business owners available on the market; you’ll find that most have a few key expenses that they cover. Those expenses are ones that are deductible for federal tax purposes. These include:
- Lease payments
Many BOE policies have a variety of riders that are available for purchase.
From residual disability to business loan protection, business owners can protect themselves from additional contingencies, should they arise.
Having Business Overhead Expense insurance is especially important for those that have large fixed costs in their business. If you have a business that would suffer due to your inability to work, the purchasing business overhead expense insurance is what you need.
Although this article is fairly lengthy, disability insurance for business owners covers a lot of bases. Whether you’re looking to protect yourself, your business interests, or your business itself, we can help.
Business owners face a lot of risk when it comes to a potential disability. The average employee risks personal loss but can always go back to work (if they are no longer disabled). The business owner risks not having a business to come back to.
If you’d like to learn more on your own, then check out Your Complete Guide To Buying Disability Insurance. If you’re ready to have us guide you, then contact us today for a complimentary consultation to identify your needs and options.
We offer expert, unbiased advice on disability and life insurance. Should you find yourself in a position where one of these policies may benefit you, then by all means, please contact us.
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We hope to hear from you soon.