Disability Insurance for Business Owners & Executives

Why Business Owners Need Disability Insurance

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.

Disability Buyout

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.