Disability Insurance for Small Businesses: Protecting Your Enterprise and Income

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As a family business or small enterprise proprietor, you've undoubtedly dedicated countless hours and financial resources to build your establishment. But have you considered protecting your business against unforeseen circumstances, such as a disability that could potentially halt operations? If not, then understanding the importance of disability insurance for family businesses becomes crucial.

Disability insurance is a safety net that ensures the continuity of your business even if you or a key member of your business cannot work due to an illness or injury.

The Role of Disability Insurance

No matter how much we plan and prepare, life can throw us curveballs that disrupt our best-laid plans. One curveball could be an unexpected illness or injury that incapacitates you or a key member of your business.

Disability insurance offers income protection if you're unable to work due to an injury or illness. It ensures that despite your inability to generate income, your personal and business expenses can still be covered. It's a lifeline that can keep your business afloat during tough times, offering financial security until you can get back on your feet or find a capable replacement.

4 Types to Consider

Disability insurance for small or family businesses is not a one-size-fits-all solution. There are numerous types of disability insurance, each offering unique benefits tailored to different business needs

1. Business Overhead Expense Insurance (BOE)

BOE is a type of disability insurance that covers operating expenses if the business owner or a key employee becomes disabled. It covers all expenses, including payroll, except the owner's salary, usually provided by a separate policy. The policy typically has a short elimination period to ensure that operating expenses can begin to be covered promptly.

2. Disability Income Insurance (DI)

The goal of DI is to protect your ability to earn income. DI policies are typically long-term contracts extending to age 65 or 67. The benefits are based on a percentage of your income, which varies based on your occupation but not exceeding 60-80%. Payments are made directly to you and are generally tax-free.

3. Key Person Disability Insurance

This insurance pays the company for the loss of a key person's services during their period of disability. It provides cash to the company until the key employee recovers or a capable replacement is found. The premium payments are not tax-deductible, but the benefits are tax-free when received.

4. Buy-Sell Disability Insurance

This policy pays a lump sum to the disabled partner in exchange for the sale of their interest in the business if the owner becomes disabled and can't return to work after a certain time. The waiting period usually corresponds to the benefit period of the BOE policy, which may be one to two years.

Riders for Small Businesses

There are several beneficial disability insurance riders, or additional coverage options, that small business owners can consider

Cost of Living Adjustment (COLA): Increases your monthly benefit to keep up with inflation.

Future Increase Rider: Allows you to add more coverage if your income increases without having to undergo another medical exam.

Non-Cancelable/Guaranteed Premiums: Keeps your policy active and your rates the same as long as you make payments on time.

Retirement Protection: Replaces the retirement contributions you made while working.

Disability Insurance vs. Business Overhead

It's important to distinguish between disability insurance for small business owners and business overhead expense insurance (BOE).

While disability insurance covers your personal expenses, BOE covers your business's expenses for one to two years, including rent and utilities, maintenance fees, accounting fees, salaries, and more.

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Both types of insurance are crucial in safeguarding the financial health of your business during times of disability - and as a business owner you might want to consider either or both depending on your specific circumstances.

Family and Small Business FAQs

Does a Small Business Owner Need to Provide Disability Insurance for Employees?

In some states, family businesses are required to provide short-term disability insurance to their employees. This includes states like California, Hawaii, New Jersey, New York, and Rhode Island. In such instances, some money from employees' wages can be used to offset the cost of providing disability insurance, so you don't have to bear all the costs yourself.

When Should a Family Business Owner Get Disability Insurance?

It's generally advised to secure disability insurance before starting a family business, as it's easier to verify your income at this stage. However, you can still get disability insurance after starting your business, although it may take longer. In such cases, disability insurance companies may ask for signed contracts instead of tax returns to prove future income.

The Cost of Disability Insurance for a Family or Small Businesses

The cost of disability insurance for family business owners is usually 1% to 3% of your income. Your premiums also depend on your benefit amount, any extra riders you add to your policy, and your policy’s waiting period. Tools like a disability calculator can help you find affordable coverage so that the cost of your disability insurance doesn't take away too much from your business's revenue.

How to Secure Disability Insurance for Small Businesses

Here is a step-by-step guide to securing disability insurance for small businesses:

Decide when to get disability insurance.

Calculate how much coverage you need.

Consider riders.

Compare disability insurance quotes.

Fill out a formal application.

Complete a phone interview.

Go through underwriting.

Sign your policy and get covered.

The Bottom Line

In conclusion, disability insurance for small businesses is not just an option but a necessity. It's a smart move that safeguards not just your personal income but also the financial stability of your business in the event of unforeseen circumstances.

As a business owner, it's your responsibility to protect your business and your employees' livelihood. By understanding and investing in disability insurance, you're taking a significant step toward securing the future of your enterprise.

Disability Insurance for Family Businesses