Protect Your Business with Disability Income Insurance

While many business owners understand the need for life insurance coverage, they often overlook the potential risk associated with a serious disability. According to the Council for Disability Awareness (2016), just over 1 in 4 of today's 20 year-olds will become disabled before they retire. How long would you be able to cover your personal and business expenses if your income and revenue were to stop suddenly due to a disability?

Consider the following example. At age 48, Richard was the president and co-founder of a small, but growing, machine tool company. He thought he was in excellent health. However, one day without warning, he suffered a minor cardiac incident. Although it left no permanent damage, the follow-up surgery resulted in complications that sidelined him for the next two years. By the time Richard was finally able to return to work, he had narrowly missed declaring personal bankruptcy and losing his business. Unfortunately, his retirement savings had been depleted in the process.

According to the Centers for Disease Control and Prevention (CDC, 2016), chronic conditions, such as heart disease, diabetes, and cancer, are the leading causes of disability, and cause major limitations in daily living activities for more than one in every 10 Americans, or 25 million people. What can you do if such a situation prevents you from fully performing the duties of your job? As a business owner, you could find yourself in a dire situation.

There are two important types of insurance protection that can help safeguard both a portion of your income and your business. First, disability income insurance can replace a portion of your income, should you experience a disability. Your business may already have a group long-term disability (GLTD) plan. Most employer-sponsored GLTD plans replace a portion of an employee’s salary, but monthly benefits and benefit periods may be limited. In addition, benefits from a GLTD policy are often taxable, thus reducing the amount available for disability expenses. However, you can extend your coverage by either purchasing an individual disability income insurance policy outside of your GLTD plan or participating in a group plan through a business or professional association. When purchasing a policy, pay particular attention to the way the term “disability” is defined. Some policies cover you if you are unable to work in your own occupation, while others cover you only if you are unable to work at all in any occupation.

Second, a business overhead expense (BOE) insurance policy can help cover business expenses and other continuing fixed costs, such as utilities, rent, and equipment leases, should you experience a disability under the terms of the policy. In general, benefits are paid monthly after a predetermined waiting period, limited to a maximum amount, and restricted to a specified length of time, which often is one to two years. Therefore, if you are temporarily unable to work, thus affecting your business’s ability to generate revenue, you can rest assured that the bills will continue to be paid without interruption.

While it may be difficult to contemplate, consider what might happen to your company if you became permanently disabled. Would you be forced to sell the business below fair market value (FMV)? If you have co-owners, they may agree to continue your salary on a temporary basis, but they may be unable to do so indefinitely. One way to prepare for such a situation is to establish a disability buy-sell agreement, which is a contract that specifies who will purchase the business and at what price, in the event of a disability. Through the agreement, your co-owners could use the proceeds from a disability income insurance policy to purchase your share of the business.

Don’t let a disability derail your business. Disability income insurance, business overhead expense insurance, and a disability buy-sell agreement are tools that can help keep your future—and your business—on track.


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