Business owners work tirelessly to establish and grow their business, investing time, money and energy into building a successful venture. If you’re someone who’s familiar with the intensity of that commitment, have you considered what would happen to your business if you were unable to work due to a disability?
Disability insurance provides a crucial safety net by replacing some of your income and helping to provide financial protection when you and your family may need it the most. In this article, we will explore the importance of disability insurance for business owners and how it can help protect your livelihood in times of need.
Disability Insurance: Protecting Your Income in Times of Need
Disability insurance is a type of coverage that can replace a portion of your income if you become disabled – for example, due to an injury or illness – and are unable to work. Disability insurance is available under public government programs, and individual disability insurance can be provided by an employer or can be purchased from private insurance companies.
Government Disability Insurance
Government disability insurance for all American workers is provided by the Social Security Administration. However, Social Security Disability Insurance (SSDI) benefits are not available to workers who earn more than $1,470 per month, as well as those whose disability is expected to last fewer than 12 months. Additionally, in order to receive SSDI benefits, disabled workers must show that they are unable to do any type of work, not just a particular occupation or task.
For these reasons, private disability insurance may provide more suitable income protection for a higher-earning individual or a business owner who may have a business based on an occupational specialty or must manage a budget based on an income that exceeds the SSDI eligibility limit.
Employer and Group Disability Insurance
Many workers can enroll in employer-sponsored group disability insurance coverage. While some employers pay the cost of this coverage as part of an employee’s total compensation package, others enable their employees or group members to purchase individual disability insurance on a voluntary basis.
Private Disability Insurance
Private disability insurance is designed to provide financial support and protect earning potential during periods of disability. The policy pays out a predetermined percentage of the policyholder’s pre-disability income, helping to cover essential expenses such as mortgage payments, utility bills, medical costs and other expenses of daily living.
Why is private disability insurance essential for business owners?
The strategic benefits of carrying individual disability insurance include protecting the business owner’s income, safeguarding the operations of the business and having greater peace of mind knowing that family members, employees and others who depend on the business are well-protected.
As a business owner, personal income and the success of the business may be very closely linked. If the business owner suffers an injury or illness, his or her resulting inability to work and direct the operations of the business could result in a significant loss of income.
Disability income insurance allows policyholders to continue to receive a portion of their income, helping to mitigate the financial impact of the disability and making it easier to meet personal and commercial financial obligations.
Safeguarding the Business
Disability suffered by a business owner is not just a risk to personal income; it can also have a profound effect on the conduct of the business and the incomes of employees. Many small businesses rely heavily on the owner’s active involvement as both a leader of the team and an individual producer of revenue. Without the owner, these core contributions are lost for as long as an illness or injury may continue. In the case of permanent disability, they may be lost altogether.
However, with disability insurance, business owners can bridge a loss of income and be better equipped to hire assistance to manage the day-to-day challenges facing the business. They can also look after ongoing expenses and even invest in strategies to keep the business growing during their absence.
Peace of Mind
Disability insurance helps provide business owners with peace of mind. The security of knowing that the business has a safety net to fall back on should they be unable to work can be a priceless and valuable asset. With disability coverage in place, business owners can focus on operational objectives without worrying how a disability would impact the business or their family.
Short-Term Disability Insurance
Short-term disability insurance policies, sometimes known as temporary disability insurance, typically provide coverage for a limited period, ranging from a few weeks to a few months.
These policies offer immediate income replacement in the event of a temporary disability, such as an illness, maternity or injury. The objective of short-term disability insurance is to enable policyholders to maintain their personal finances until they can return to work and restore their regular income.
Notably, short-term disability is distinct from workers’ compensation insurance, which business owners may already possess. While workers’ compensation insurance only applies to work-related injuries or illnesses, temporary disability insurance can cover injuries or illnesses that don’t occur while at work. Learn more about the differences here.
Long-Term Disability Insurance
Long-term disability insurance provides coverage for an extended term, usually until retirement age or another end date specified in the policy. Long-term coverage offers a more comprehensive level of protection, enabling policyholders to receive a portion of their income for the term specified in the long-term disability policy.
Leading Causes of Disability Claims
Insurance industry data show that the leading causes of short-term disability insurance claims (in order of occurrence, from most to least frequent) are maternity, injuries, digestive disorders, back pain, circulatory problems and mental health.
The leading causes of long-term disability insurance claims are cancer, circulatory disease, musculoskeletal injuries, back injuries, miscellaneous injuries and mental health.
The highest risks of being rendered unable to work are childbirths, which are often both planned for and welcomed, followed by various types of injuries, which by their nature are accidental and unexpected.
Four Factors to Consider When Choosing Disability Insurance Options
As with all insurance, one disability policy may cover only the basics with short-term, modest benefits, while another policy may provide generous benefits with many long-term options. In order to establish the coverage that best fits an business, the owner must consider four important factors:
- The Coverage Amount – How much income must be replaced? How much short-term disability insurance is needed? How much long-term disability coverage is needed?
- The Elimination Period – How long can the business wait before benefits are paid?
- The Definition of Disability – How does the insurance company define disability? Is the insured unable to fulfill the former occupation, or any occupation? Is the insured fully disabled? Is the disability permanent?
- The Benefit Period – How long must the disability income insurance policy benefits continue?
Let’s take a closer look at each of these options and consider how they influence both the coverage and the cost of a disability insurance policy.
The Coverage Amount
Insurance advisors take many factors into consideration when advising business owners on the coverage amount of disability insurance. One of the first considerations is the amount that would be sufficient to see their business through a crisis. Additional insight is gained by reviewing personal and business expenses, mortgage payments, loan obligations, utility bills, payments to suppliers, employee salaries and other expenses that must be managed.
Many disability income insurance policies will pay 40 to 60 percent of the policyholder’s pre-disability salary. If this is not enough, supplementary coverage can provide additional income in the case of a disability.
The Elimination Period
The elimination period is the waiting period from the filing of a disability insurance claim to the start of receiving disability benefits. This waiting period can range from a few weeks to a few months. The insured and his or her insurance advisor will consider whether the length of the elimination period aligns with the financial resources, access to funds and ability to manage expenses during a given length of time.
The Definition of Disability
Each insurance company has different policies for disability coverage and different definitions of disability. Some occupations may require 100 percent use of the business owner’s abilities to speak or walk, while other jobs may be less physically intensive.
One insurance company may acknowledge disability to be the inability to perform the policyholder’s former or preferred occupation, while another may only consider him or her disabled if the policyholder is unable to work in any occupation. Your insurance advisor will help you understand the potential definitions of disability and choose a policy that suits the needs of the business.
The Benefit Period
The benefit period determines the length of time the disability policy will pay disability benefits. In a short-term policy, this may be an estimate of recovery time from an accident or illness. In a long-term policy, this may be based on the time remaining until the policyholder reaches retirement age or another specified length of time.
What does disability insurance cost?
The above factors (coverage amount, elimination period, definition of disability and benefit period) will generally determine the cost of a disability insurance policy.
When the coverage amount is higher, the elimination period is shorter, the definition of disability is more expansive or the disability benefits period is longer, monthly premiums will be higher.
Likewise, when the coverage amount is lower, the elimination period is longer, the definition of disability is more limited or the disability benefits period is shorter, the monthly premiums will be lower.
How hard will it be to resume work?
Consider that a high-earning business owner may have a highly specialized educational and professional background that would limit the ability to change occupations if required to do so by a disability. On the other hand, a business owner in a less specialized field may have more options for converting to another business or moving to another occupation. The ease or difficulty of resuming work, whether in the same business or in a different industry, is always a strategic factor in selecting disability insurance coverage.
Every business is unique, and as with any insurance, there is no one-size-fits-all solution. Just as with property, auto or health insurance, making the wrong choices will mean spending too much or not carrying enough protection.
Talk With a Professional Insurance Advisor
As a business owner, you likely have a myriad of commercial insurance policies to help protect your business. But, it’s just as important to protect your personal income, which goes hand-in-hand with safeguarding the operations of your business and the financial future of your loved ones. Disability insurance coverage is an essential component of business planning and financial security for every business owner.
Talk to one of Higginbotham’s personal insurance professionals today for assistance in finding disability insurance coverage amounts and options that represent the best fit for the unique needs of yourself and your business.