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 actively work in and on your business on a regular basis in order to generate revenue necessary to create an income for yourself and your employees.

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 necssary 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.

Types of Small Business Disability Insurance

As a business owner, setting up disability insurance for small business is one of the most important things you can do. For entrepreneurs, proper disability insurance coverage requires more than just taking steps to protect personal income following an injury or illness. Business owners’ need for disability insurance often necessitates three types of disability insurance policies:

Income Protection

Own occupation disability insurance srovides personal income protection, providing a percentage of pre-disability income to insured individuals. The benefits you receive under this type of policy are intended to help you meet the expenses of daily living.

Business Overhead

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.

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 receives 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 of 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 business 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

When you’re choosing disability insurance, taxes are an important consideration. The time to make sure your questions about disability insurance and taxes are answered is before you purchase a disability policy. That’s because the answer to the question of whether or not benefits are taxable is based on the manner in which policy premiums are paid.

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 benefit 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.

Richard Reich

CEO - Licensed Agent

Richard Reich CEO and Licensed agent

In my 20+ years as an independent life and disability insurance broker, I have personally assisted thousands of clients with their life and disability insurance needs.  Being independent, I represent many highly-rated insurance companies and, because I am not beholden to any one insurance company, my focus is to find the right company and policy for each individual client. I believe that when people shop for insurance (or anything else, for that matter) on the Internet, they are looking for a simple, non-intrusive, non-pressure method of doing so.  I strive to treat my prospective clients with the utmost respect and I believe an educated prospect can make the right decision without sales pressure. Please feel free to contact me at your convenience.