There are several compelling reasons to secure personal disability insurance to safeguard your earnings should you become incapacitated. However, when you are a business owner, it’s not solely about personal protection. As the key motivator and financier of your enterprise, you have an essential role in your business’s overall functioning. Consequently, part of your business strategy should incorporate a plan for if you are unable to work.
A startling fact from the Council for Disability Awareness (CDA), a group within the insurance sector, states that one in four individuals in their twenties today will become incapacitated before reaching retirement age. The average duration for long-term disability claims is approximately 34.6 months, almost a three-year hiatus from work.
It’s essential to understand that these disabilities aren’t caused by weekend thrill-seeking activities like motorcycle racing or lengthy commutes. Instead, they’re more likely due to health issues such as heart disease, back ailments, cancer, and other medical complications, which cause more disability instances than accidents.
Why Business Owners Need Disability Insurance
The need for disability insurance for executives and business owners is clear. When you are an entrepreneur, your ability to earn a living is directly proportional to your ability to operate your business. No matter what type of company you own, when you’re in business for yourself, you don’t earn money simply for putting in hours at work. You have to be able to be actively at work in and on your business on a regular basis in order to generate the revenue necessary to create an income for yourself and your employees.
Moreover, as a business owner, you carry a heavier responsibility than most. Your inability to work could potentially affect not only your income but also the livelihood of your employees and the overall survival of the business. The domino effect of a personal disability could lead to financial strain, job losses, and even the complete shutdown of the business. Therefore, having disability insurance in place provides a buffer that protects both your personal income and your business operations, thus minimizing the impact of such an unfortunate event.
Additionally, a significant aspect of entrepreneurship involves planning for future contingencies. Disability insurance acts as an important part of this business continuity plan, ensuring your enterprise can weather unexpected disruptions. Think of it as a safety net that provides you the financial stability to maintain operations, retain employees, and fulfill financial obligations even in the face of personal incapacitation. Therefore, securing disability insurance is not merely a matter of personal protection but a crucial component of responsible business ownership.
Disability Insurance for Executives
When a small business owner becomes disabled, both personal finances and the company’s ability to continue operating are jeopardized. When you own a small business, it’s certainly important to protect your personal income with disability insurance for executives and business owners. Further, it’s also necessary to take steps to make sure you don’t find yourself in a position of being unable to cover your company’s overhead expenses if you become disabled for a period of time. That’s why small business owners are well served by setting up business overhead coverage for their companies as well as professional disability insurance for themselves.
Beyond securing personal income and managing overhead costs, it’s also vital to consider the overall direction of your business should you become disabled. Your leadership and decision-making capacities are integral to the functioning and success of your small business. Hence, disability insurance for executives can extend into key person disability insurance, which provides a payout to the company if a key executive becomes disabled. This type of coverage allows the business to stay financially stable while searching for or training a replacement, mitigating the potential disruption to the business. This layered approach to coverage not only protects your income but also ensures the long-term resilience of your business.
In addition to being concerned about personal expenses, entrepreneurs must also take steps to make sure they can continue to pay business overhead expenses following a disability. The best small business disability insurance plans include business overhead coverage, which provides funds to take care of building leases, taxes, staffing expenses, and other operating expenses in the event the owner becomes disabled.
Furthermore, this kind of coverage plays a crucial role in maintaining business credibility and preserving customer trust. If a disability leads to operational disruptions, it can negatively impact your relationship with customers, vendors, and other stakeholders.
Business overhead coverage helps to maintain the rhythm of your operations, enabling your business to fulfill obligations like paying invoices and delivering services or products on time, even when you, as the owner, are temporarily incapacitated. This continuity of service not only helps to preserve your business reputation but also enhances the confidence of your stakeholders, ensuring that your business remains competitive in your absence.
Key Person Disability
Many small businesses need the added protection of key person disability insurance. This type of coverage pays benefits to the company if one of the owners or another key person experiences a disability. Proceeds can be used to hire a replacement or an outside firm to handle services the covered individual is no longer able to perform. These types of policies are owned by the business rather than by the insured individual.
The business pays the policy premiums and receives the benefits in the event that the person covered by the policy experiences a disability. If the covered key person becomes disabled, the business will receive either a lump sum payout or monthly payments that can be used to pay the expenses incurred when hiring outside help to take care of the duties ordinarily handled by the disabled individual.
Do you have business partners? Have you stopped to think about what would happen to your business if one of the owners was to become disabled? Many business partners draft buy-sell agreements that specify what actions should be taken in the event that one or more of the partners becomes unable to work due to a disability. These legal documents also spell out the course of action that will be followed if one of the partners dies.
In most cases, these types of agreements specify that the partners who will continue to run the business will purchase the affected partner’s stock, either from the individual or his or her estate (in the event of death). When such agreements are drawn up, it’s common for the company to purchase both key person life insurance and disability buyout insurance. This type of disability insurance for businesses is designed to make sure that funds will be available to execute the buy-sell agreement in the event of a worst-case scenario.
Disability Insurance and Taxes
Taxes play a crucial role when deciding on disability insurance. It’s essential to resolve all your queries about disability insurance and taxes prior to acquiring a disability policy. This is because the taxability of the benefits you receive hinges on the method by which the policy premiums were paid.
Moreover, understanding the tax implications linked with your disability insurance is an essential part of financial planning. As such, it’s recommended that you engage with a tax advisor or a financial planner during the decision-making process. They can help clarify the tax aspects tied to various policies and guide you toward a decision that aligns with both your personal and business objectives. This way, you can ensure that you maximize the benefits of your disability insurance while also maintaining tax efficiency.
Disability Benefits That Are Not Taxable
Disability Benefits are not taxable if the policy premiums are paid by post-tax dollars. When you take out an individual disability policy that you pay for yourself, you’ll be using money that you’ve already paid income tax on to pay the premiums. If you become disabled and receive disability benefits, the funds you receive will not be taxable.
Taxable Disability Insurance Benefits
Typically disability insurance benefits paid under a group disability benefits program are taxable as ordinary income. That’s because the policy premiums are either paid by the employer or are paid by the employee with pre-tax dollars under a payroll deduction plan. Keep in mind that any benefits you receive under a policy with premiums paid with pre-tax dollars are subject to income tax liability.