Think about what could potentially force you out of business. A bad economy. New competitors. Losing a key customer. Supply chain problems. Lack of cash or credit. Natural disasters. And lately, an unprecedented global pandemic that forced the temporary closure of many businesses, perhaps even yours. Disability insurance.
When you look at that list, you may notice they are mostly external factors. Most are even outside your control. That’s the risk involved in starting and running a small business, especially if it’s your primary income.
But what if something happened to you, the owner?
If you suffered a heart attack, were seriously injured in a car accident or lost use of limbs, would your business survive? If not, what would you do for income during the six months, two years, or longer you are unable to work?
Fortunately, that’s where disability insurance comes in. Here are four things business owners need to know about protecting their income against disabilities.
A disability can affect your work for a few months to the rest of your life
Any amount of time you can’t work is a detriment to your business and your household budget. That’s why there are two main types of disability insurance: short term and long term.
Disability insurance replaces income that you can’t earn because of your inability to work due to a disability. Without it, a disability could cause financial hardship. You may have to close your business or hire a temporary replacement. You may have trouble paying bills, those owed by your business and those you pay at home.
Short term disability is typically for temporary, less serious injuries that limit the ability to work, but that people generally recover from.
Long term disability insurance is designed to last longer than other types of disability coverage. It covers serious ailments that may last several months or years. Permanent disabilities are also covered by long term disability insurance.
As a small business owner, you absolutely need a long term disability insurance policy. With long term disability, you can select how long you want to receive benefits if you become disabled. You may choose a benefit period of five years, 10 years or longer. You might also choose to receive benefits up to a certain age, such as 65.
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On the other hand, the need for short term disability policy isn’t as black and white. In many cases, it may be just as expensive as a long term disability policy, but offers benefits for a shorter period of time. Also, people usually recover from injuries or illnesses that generate short term policy benefits.
If you can most likely work in some capacity with a short term disability, you may not need short term coverage. Instead, some people suggest setting aside an emergency fund to have in the event you miss work for a few months.
The difference between group and individual insurance
There are two main sources of disability insurance.
One is group disability insurance. Group coverage is when a large group of people, such as employees of a company, get coverage as part of the same plan. Typically, group members are automatically enrolled in the insurance plan if they choose. Members may pay all, some or none of the premium. The group sponsor pays whatever the member doesn’t.
As a small business owner, you may want to consider offering group disability coverage for your employees.
An individual policy is one that covers a single person. You are the only insured, you own the policy and you pay the full premium amount on the policy. Because there is more risk involved to the insurance company, you will also have to go through underwriting to qualify for coverage, which you don’t have to in a group plan.
There are several reasons why a business owner needs an individual policy even if they are covered by a group policy:
Group coverage may not provide sufficient benefits, especially if you have a large income. Group policies only offer basic benefits with few optional features.
Because there is financial underwriting, individual policies can better reflect the variable income that business owners earn from year to year.
If your business struggles, you may have to cancel its group disability coverage. However, you can continue paying the premiums on your individual disability insurance policy.
You should also consider business overhead expense insurance
An individual disability policy will replace your income. But what happens to your business in the event of a disability?
That’s what business overhead expense (BOE) insurance is for.
A BOE policy will help cover your monthly business expenses if an injury or illness impacts your ability to work. The typical maximum monthly benefit is between $15,000 and $25,000.
You can obtain BOE coverage as a standalone policy or bundled with your personal disability policy.
They typically only cover the cost of your business overhead, such as rent/mortgage, utilities, taxes, employee salaries and equipment maintenance. The amount the policy pays in benefits will be based on the company’s monthly overhead expenses each month, up to a cap.
If you’re part of a partnership or multi-owner corporation, the BOE policy will likely cover your share of expenses. This is usually based on how much of the company you own at the time of disability.
How much should you spend on disability insurance?
In general, people spend between 1 percent and 4 percent of their income on a disability insurance policy. Another general rule of thumb is that you will typically pay between 2 percent and 6 percent of your policy’s monthly benefit amount.
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It’s possible you may pay more or less than those ranges.
As with all types of insurance, disability insurance cost is based on the likelihood of you filing a claim. With disability insurance, there are a number of factors carriers use to determine your risk level. These include:
How long you choose to receive benefits
To get an idea of how much it will cost for you, check your price with a free disability insurance quote from Breeze.
It’s never been easy to run a business. That’s why half of small businesses fail within five years.
It’s even more challenging in 2020 with the pandemic and the economic effects of it. Therefore, trying to find money in the budget for something like disability insurance may not feel like a priority right now.
But if you’re staying in business and looking beyond the pandemic, you should strongly consider disability coverage. We’ve all been reminded in the past few months how quickly life can change.
Having disability insurance means you and your business can weather a storm that affects you directly.