Set for Life exceeded my expectations. They took the time to get to know me and understand my needs. They provided excellent service and communicated well throughout the initial process and over the years.

— Dr. Alexander W., Anesthesiologist, New Haven, CT

Disability Insurance for Business Owners

Considering disability insurance? Consider the facts.

  • Your most valuable asset is your ability to bring in an income. For business owners like yourself, your future income is your payoff for all of your years of  hard work and accumulated debt.
  • Your student loans do not go away if you become disabled.
  • You may be eligible for a group rate or discounts. Depending on the company, you may be able to set up discounts if 2 or 3 people apply for a policy from the same employer. As a business owner, you may be able to select a few people from the business to apply for a policy and save a substantial amount on your premiums.

Group benefits vs. an individual policy

If you have 10 or more employees, you may be considering a group policy. Group policies typically offer a limited monthly benefit (60 percent of your income to a maximum amount). If your income exceeds $200k, the percentage of benefits replaced may start to reduce if you have maximum limits on the policy.

Group policies can’t discriminate – they must offer coverage to everyone in the group. Consequently, they often lack the important provisions of a personal policy.

  • Your group policy may require you to be totally disabled and not able to work in any capacity before you can receive any benefit.
  • The benefit may be taxable income to you if the employer is paying the premiums.
  • Your employer may cancel your policy at any time.
  • Even if you have a group policy, it is still important to consider supplementing with an individual policy.
  • Your individual policy is portable and you may take it with you if/when you leave your employer.
  • The policy definitions on an individual policy are usually superior (own-occupation, inflation protection).
  • If you are only partially disabled, your group policy may not pay you.
  • Having an individual policy protects your insurability by purchasing increase options. If your health changes, you may still purchase more coverage in the future based only on financial underwriting.

In addition to individual disability insurance, there are several other areas a business owner should consider:

Key Person Disability Insurance

In many cases, the most valuable asset a business has is one or more “key employees”. While the employee may be covered by individual disability insurance and even worker’s compensation, if they were to suffer a disabling illness or injury, the business itself stands to lose significant earnings through that loss. Key-man disability insurance is designed to insure against this potential loss, for the sake of the business.

Small to Large Businesses

Small businesses may rely heavily on a sole individual, without whom the business would quickly fail. However, even medium and large sized businesses rely much more on some individuals than on others. Losing these key employees can mean a huge potential loss in revenue or, worse still, it could mean the end of the business completely.

Determining the Financial Value of an Individual

Any company looking to take out a key person disability insurance policy needs to consider all of the financial impacts and cost implications of losing that employee. Consider the direct revenue that individual brings in to the company and how much it would cost to find and train a suitable replacement. Hiring a new recruit can be a lengthy process for some positions, and they will almost certainly require some time to become proficient in the new position. All of these factors need to be considered when determining the financial value of a key member of staff, partner, stakeholder, or any other individual.

Monthly or Lump Sum Payments

Companies usually have two options regarding a financial payout; monthly repayments or a single lump sum payment. Monthly repayments usually continue for a period of between 6 months and 2 years because it is assumed that a candidate can be found and adequately trained within that period. Lump sumps are calculated using this same period but the entire settlement is made upon the disability to that key member of staff.

Key Person Disability Insurance

Once a payment has been made, it is at the discretion of the company as to how the money is spent. There are usually no stipulations on whether it should be used to train an existing staff member or start a hunt to find a new one.

Business Overhead Expense (BOE)

What would happen to a business owner who is unable to work for an extended period of time due to an injury or illness? How would rent, payroll and other expenses be paid if the person who drives the practice income is unable to produce? Personal disability insurance protects personal income, but what protects his or her business?

The solution is a business overhead expense disability policy. It covers the ongoing operating expenses of your business and ensures that you do not have to use personal assets to pay for business expenses if you become disabled. It pays a monthly benefit to keep the practice afloat so that you can recover.
The following are some business overhead expenses that are covered by BOE insurance:

* Rent or Mortgage Payments
* Employee Salaries and Benefits
* Utility Bills
* Property Taxes
* Accounting Fees, Legal Fees, and Professional Dues
* Malpractice and Other Business Insurance Premiums
* Maintenance and Janitorial Services
* Depreciation
* Interest on Business Debts
* Office Supplies

Some policies even cover the salary of a temporary employee hired to do the duties of the disabled. Income taxes, the cost of inventory, and the cost of furniture are a few expenses that are not covered.
There are several key areas in which Business Overhead Insurance differs from personal disability insurance.

Benefit Periods

Usually, overhead expense insurance policies have short benefit periods such as 30 days. Remember that overhead expense insurance is not protecting your ability to generate income-that is what a personal disability policy does. Instead, it allows you to keep your business open, or at least pay for its expenses until you recover. In the case of a long-term disability, it offers you up to two years to make a business decision, such as whether to shut down or liquidate your business, without worrying about accruing debt from business expenses.

Maximum Benefits

Personal disability insurance pays a monthly benefit as defined in the policy. Overhead expense policies allow you to purchase up to $50,000/month benefits.

Taxation

As long as premiums for personal disability insurance are paid with after-tax dollars, the benefits are tax-free. Overhead Expense insurance benefits are subject to income tax, but the premiums are tax deductible as a business expense. Therefore, it becomes a wash.

Disability Buy-Out Insurance (DBO)

It is especially important to insure against the business owner becoming disabled and unable to continue running the business. A disability buy-out insurance policy enables either the remaining owners, or the business entity itself, to buy-out the disabled owner’s share of the business at an agreeable price.

The Benefits of Disability Buy-Out Insurance

The disabled owner is guaranteed a buyer willing to pay a reasonable price for their share of the business. Because a formula is already put in place to determine a reasonable price, it also negates the need for litigation or for negotiation on the price. Furthermore, it enables the individual to concentrate on recovering from illness or injury without the added concerns of running the business or finding a suitable buyer.

The remaining owners are enabled to purchase the shares in their business without having to seek an outside investor. This ensures that they are able to continue in the normal operation of the company without having to relinquish any control. Continuity in daily operations is guaranteed and the remaining owners are provided with adequate funding to buy out the disabled partner.

The business itself would normally continue to pay the disabled partner an income, or return on their investment. This financial drain can cause serious problems for the remaining partners, especially, who will need to pick up the pace to meet the increased demands. With a buy-out policy in place, this does not have to be the case because the insurance is used to cover against this liability.

Insurance Payment Types

It is most common for a disability buy-out policy to offer a lump sum payment. This money is then used to complete a buy out in one installment. However, it is possible to arrange for the disabled partner to receive their payment in multiple installments, but this needs to be agreed when the policy is first placed in force.

Elimination Period

The majority of disability buy-out insurance policies include an elimination period consisting of between one and two years. This period helps to limit the impact of the disability on the business, and it also allows the disabled owner time to determine whether or not they will be able to consume normal duties or whether a buy-out is the best solution for all concerned.

Disability Retirement Protection.

What would happen to your ability to save for retirement if you were hurt or too sick to work? Most people in this situation, with no income and increased medical bills, are forced to use their savings to meet everyday living expenses. It’s important to put a fallback plan in place to ensure that money continues to be put away for your retirement even if you become disabled.

Can you afford a 42% loss to your retirement savings?

A permanent disability could disrupt your retirement savings, as shown here. If you can’t make contributions to your retirement plan, your retirement dreams may not become reality.

Retirement Protection Disability Insurance helps you continue saving for retirement in the event of a disability. If you become disabled, the policy pays a benefit in the amount of your retirement plans monthly contribution into a special trust. The money in the trust is invested at your discretion until you reach age 65 and then distributed to help supplement your retirement income. It is not a pension plan. Rather, it is a program that provides disability income insurance to ensure your ability to make retirement plan contributions until the age of 65. The goal: to provide you with close to what you could have expected from the retirement plan if you had not become disabled.

Retirement Protection Disability Insurance Features:

* Monthly benefits up to $3,800/month
* Coverage can be added to an existing individual or group disability insurance plan to cover more of your annual income
* Non-cancelable, guaranteed renewable coverage to age 65, which means your policy cannot be changed or canceled except for non-payment of premiums
* Portable, individually-owned coverage
* Tax-free benefits (when premiums are paid by the insured with after-tax dollars; investment earnings within the Trust are taxable)
* Underwriting is usually minimal and may not even require a paramedical exam.

About premiums

If you are concerned about paying for your disability insurance while getting established, there are several things we can do to reduce your premium as much as possible.

  • Some companies allow a “graded” or increasing premium. This is initially less expensive and your premium will increase each year. If you wish to lock it in at a later time, you may do so on any policy anniversary.
  • You may choose to simply supplement what your group policy already offers and load up your policy with increase options. This will allow you to keep your premium low during residency and still reserve the right to increase it in the future without any medical underwriting.

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