The most important piece of the disability insurance puzzle is usually a personal policy to make sure your income is taken care of should you become too sick to work.
Disability insurance for business owners can be relatively in-depth, as there are many different types of coverage available to meet the many needs. The best way for you to understand your options is based on the size of your business. A small-business owner is going to have different needs than a larger business.
Disability Insurance for Small Business Owners
It is often the case that a small business succeeds or fails based on the ability of the owner to run the business. Many times the owner truly is the business or at the very least the source of revenue. Below is a brief list of the types of disability insurance a small business owner could use to make sure the business survives in the event the owner is disabled.
- Individual Disability Insurance – This policy is designed the replace your personal income in case you are too sick or hurt to work. In the case of a long-term disability, this is always step #1 for a small business owner. You have to take care of yourself before the business.
- Overhead Expense – This policy helps make sure you have a business to come back to after you recover from a disability. It is designed to help with your deductible expenses like employee salaries, rent, utilities, and insurance premiums. Typically this policy will reimburse your overhead expenses for up to two years. You will probably know whether or not you are going to recover from your disability within two years or have to sell the business.
- Buy-Sell – If you have a partner, a disability buy-sell policy will make sure there is a plan in case one of you becomes permanently disabled.
- Group LTD – If you want to provide disability insurance benefits for your employees this is the least expensive way to do so. This plan will usually cover 60% of salary up to $5,000 or $10,000 a month. The company can pay for this, or you can have the employees share in the cost.
- Reducing Term – If you have a business loan, this policy will make the payments on that loan obligation should you ever become disabled.
The most important piece of the disability insurance puzzle is usually a personal policy to make sure your income is taken care of should you become too sick to work. Depending on the business, expenses can grow quickly if there is no revenue coming in. If you really are responsible for most of the revenue of the business, and individual disability insurance policy and an overhead expense policy are needed.
Disability Insurance for a Larger Business
Most companies offer a Group LTD policy for their employees. The typical language says that 60% of your salary is covered up to a specific monthly maximum benefit. The most common maximum is $10,000 in today’s marketplace. This coverage is the same policy for every full-time employee of the company from the receptionist to the CEO.
It is the most convenient way to offer every employee some income protection, but employees with larger incomes may need to secure a supplemental disability insurance policy to adequately protect their income.
Many LTD plans do not cover bonus or commission income and with a $10,000 monthly maximum, anybody who is making over $200,000 is under-insured. The only way to bring your actual income protection closer to 60% when you have a larger income is to purchase your own supplemental individual policy.
The last major issue with a Group LTD plan is benefits received are taxable during a claim if the company paid for the policy for the employees. People who are expecting a 60% income replacement tend to find out the real income replacement is closer to 40% after they have to pay taxes during the claim. Again, a supplemental disability insurance policy can help make up the difference.
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