Your Business’s Safety Net: Understanding Disability, Overhead, and Buy-Sell Insurance

Imagine this: You’re the heart and soul of your small business, overseeing every aspect of its operation. Then, an unexpected illness or accident strikes, leaving you unable to work. Suddenly, your business faces a crisis. Who will make decisions? How will bills be paid? Can your business survive without you at the helm?

This scenario isn’t just a worst-case scenario; it’s a reality that too many business owners face. Disability, whether temporary or permanent, can derail a business if the proper precautions aren’t in place. Disability insurance, business overhead insurance, and disability buy-sell insurance are crucial tools that help protect your business, your livelihood, and your future.

In this guide, we’ll explore these essential insurance types, debunk common misconceptions, and help you understand how to safeguard your business from the unexpected.

The Risks of Disability for Business Owners

As a business owner, you’re the driving force behind your company’s success. Your vision, leadership, and expertise are invaluable assets that contribute to your business’s growth and profitability. However, have you considered what would happen if you were suddenly unable to work due to a disability?

The impact of a disability on a small business can be devastating. It can lead to:

• Loss of income: If you’re unable to work, your business may lose its primary source of revenue.
• Decreased productivity: Your absence can disrupt daily operations, slow down decision-making, and hinder overall efficiency.
• Loss of key relationships: Clients and partners may become concerned about the future of your business and may take their business elsewhere.
• Difficulty attracting and retaining employees: Talented employees may leave if they feel the company’s future is uncertain.
• Increased financial strain: Medical bills and rehabilitation costs, along with the expenses of finding and training a replacement, can add to the financial burden.

Small business owners are particularly vulnerable to the risks of disability. You’re often deeply involved in every aspect of your business, from sales and marketing to accounting and customer service. Finding a replacement with your unique skill set and knowledge can be challenging and expensive.

Extending Coverage to Key Employees

While disability insurance is crucial for business owners, it’s also important to consider the impact of a key employee becoming disabled. A key employee is someone whose skills, knowledge, or leadership are essential to the company’s success. If a key employee becomes disabled, your business could experience similar disruptions to those caused by the owner’s disability.

Extending disability insurance coverage to key employees can help mitigate this risk. It can provide financial support to replace their income, cover the cost of finding and training a replacement, and help maintain business continuity.

Understanding Disability Insurance for Business Owners

Disability insurance is a financial safety net that replaces a portion of your income if you become unable to work due to an illness or injury. For business owners, this can be the difference between keeping your business afloat and facing financial hardship.

What Does Disability Insurance Cover?

Disability insurance typically covers a percentage of your pre-disability income, usually around 60-70%. The exact amount depends on your policy and the severity of your disability. This income replacement can be used to:

• Cover personal expenses: mortgage or rent, groceries, utilities, childcare, etc.
• Maintain your standard of living: continue paying for hobbies, entertainment, and other discretionary spending.
• Invest back into your business: cover payroll, rent, and other operating expenses to keep your business running.

Types of Disability Insurance:

There are two main types of disability insurance available to business owners:

1. Individual Disability Insurance

You, the business owner, own the insurance personally. It offers several advantages:

• Customizable coverage: You can tailor the policy to your specific needs and budget, choosing the benefit amount, benefit period, and elimination period (the waiting time before benefits start).
• Portable coverage: The policy stays with you even if you change jobs or start a new business.
• Tax-free benefits: Benefits are not taxable, as the premiums are paid with after-tax dollars.
• Broader definition of disability: Individual policies often have a more lenient definition of disability, making it easier to qualify for benefits.

2. Group Long-Term Disability (LTD) Insurance

Group LTD insurance is typically offered as part of an employee benefits package. It may seem like an attractive option due to its lower premiums, but it comes with some drawbacks:

• Limited coverage: The benefit amount is frequently capped, which may not be enough to cover all your expenses.
• Not portable: You lose coverage if you leave your company.
• Taxable benefits: Benefits are usually taxable if your company paid the premiums.
• Definition of disability can change: Group LTD policies typically have stricter definitions of disability, which may become even more stringent after an initial period (e.g., 24 months).

Key Features to Consider:

When choosing disability insurance, consider the following factors:

• Benefit period: How long you’ll receive benefits (e.g., two years, five years, to age 65).
• Waiting period: The time you must wait after becoming disabled before benefits start.
• Definition of disability: How the policy defines disability (e.g., “own occupation,” “any occupation,” or a combination).
• Riders: Additional coverage options that can be added to your policy (e.g., cost-of-living adjustments, future increase options).

Business Overhead Expense (BOE) Insurance

Even with individual disability insurance replacing a portion of your income, your personal benefits may not be enough to cover all the costs of running your business if you become disabled. This is where Business Overhead Expense (BOE) insurance is essential.

What Does BOE Insurance Cover?

BOE insurance is designed to help keep your business afloat while you’re recovering from a disability. It reimburses your business for the essential overhead expenses that keep your business running, such as:

• Rent or mortgage payments
• Utilities
• Employee salaries and benefits
• Lease payments on equipment or vehicles
• Property taxes
• Loan payments
• Office supplies
• Professional fees (e.g., accounting, legal)
• Business insurance premiums

Typically, BOE insurance benefits last for 12 or 24 months, aligning with the waiting period often found in disability buy-sell insurance policies. This can be crucial in bridging the financial gap while you’re waiting for the buy-sell agreement to take effect.

By covering these ongoing expenses, BOE insurance ensures that your business can continue to operate even if you’re unable to work. This can prevent you from falling behind on payments, losing valuable employees, and potentially having to close your doors.

Why is BOE Insurance Important?

For small business owners, BOE insurance is a lifeline. It provides a safety net that allows you to focus on your recovery without worrying about the financial burden of keeping your business running.

Additionally, BOE insurance can help:

• Maintain customer relationships: Ensuring your business continues to operate smoothly helps maintain trust and loyalty with your customers.
• Retain key employees: By covering payroll, you can keep your team intact and prevent them from seeking employment elsewhere.
• Protect your investment: Your business is a valuable asset; BOE insurance helps safeguard that investment.
• Give you peace of mind: Knowing that your business expenses are covered during a disability can alleviate stress and anxiety, allowing you to focus on your health.

Disability Buy-Sell Insurance

When you co-own a business, the unexpected disability of one owner can create significant challenges. It can lead to disagreements about the future of the business, financial strain, and even legal disputes. A buy-sell agreement funded by disability buy-sell insurance provides a solution to these potential problems.

What is a Disability Buy-Sell Agreement?

A disability buy-sell agreement is a legally binding contract that outlines how the business will be handled if one of the owners becomes disabled. Typically, the agreement stipulates that the remaining owners will buy out the disabled owner’s share of the business.

To learn more about buy-sell agreements, take a look at our comprehensive guide.

How Does Disability Buy-Sell Insurance Work?

Disability buy-sell insurance provides the funds needed for the buyout outlined in the buy-sell agreement. This ensures a smooth transition and protects the business from financial hardship or disagreements.

The insurance policy pays out a lump sum benefit to the remaining owners upon the disability of the insured owner. This benefit is then used to purchase the disabled owner’s share of the business, as per the terms of the buy-sell agreement.

Why is a Buy-Sell Agreement Funded by Disability Buy-Sell Insurance Crucial?

Without a buy-sell agreement in place, a disabled owner’s share could become tied up in legal battles or force the business to liquidate assets to buy out the owner’s share. This can be devastating for the business and the remaining owners.

A buy-sell agreement funded by disability buy-sell insurance offers several key benefits:

• Business continuity: It ensures the business can continue operating without interruption, even if a co-owner becomes disabled.
• Financial protection: It provides the funds needed for a fair and equitable buyout, preventing financial strain on the business and the remaining owners.
• Peace of mind: It gives all owners peace of mind, knowing that their interests are protected in the event of disability.
• Dispute resolution: It establishes a clear process for handling the buyout, minimizing the risk of conflicts or disagreements.

Choosing the Right Insurance for Your Needs

Selecting the right combination of disability, business overhead expense, and buy-sell insurance requires careful consideration. There is no one-size-fits-all solution, as the ideal coverage will vary depending on your unique circumstances, business needs, and health. It’s important to act sooner rather than later, as your health and insurability can change unexpectedly.

Factors to Consider:

When evaluating your insurance options, consider the following factors:

• Industry: Different industries have varying risks and income fluctuations. Your industry can impact the type and amount of coverage you require.
• Revenue: The size and financial stability of your business will influence the level of coverage required to protect your income and overhead expenses.
• Number of employees: If you have employees, you’ll need to consider their salaries and benefits when determining the appropriate amount of overhead insurance. If you have co-owners, a buy-sell agreement is essential.
• Specific risks: Are there any unique risks associated with your business that may require additional coverage or specialized riders?
• Budget: While insurance is prudent, choose options that fit within your budget.
• Health: Your current health status can impact your eligibility for certain types of insurance and the premiums you’ll pay.

We’ll work closely with you to:

• Assess your needs: We’ll conduct a thorough assessment of your business to identify potential risks and vulnerabilities.
• Explain your options: We’ll educate you on the different types of insurance available and help you understand the pros and cons of each.
• Customize a plan: We’ll tailor an insurance package that aligns with your specific needs, budget, risk tolerance, and health status.
• Provide ongoing support: We’ll be there to answer your questions, help you change your coverage as your business evolves, and assist you with filing claims if needed.

By partnering with Taxevity, you can gain peace of mind knowing that your business is protected by a comprehensive and personalized insurance plan designed to meet your unique needs.

Common Questions About Disability Insurance for Business Owners

Q1: Can I get disability insurance if I have a pre-existing condition?

It depends on the condition and the insurance company. Some insurers may exclude coverage for pre-existing conditions, while others may offer coverage with limitations or higher premiums. It’s crucial to disclose any pre-existing conditions when applying for disability insurance to avoid potential issues with your claim later on.

Q2: How much disability insurance do I need?

The amount of disability insurance you require depends on your income, expenses, and financial obligations. A general rule of thumb is to aim for coverage that replaces 60-70% of your pre-disability income. However, you may need more or less coverage depending on your individual circumstances. An insurance advisor can help you determine the right amount of coverage for your needs.

Q3: How long does it take to get approved for disability insurance?

The approval process can vary depending on the insurance company and the complexity of your application. It usually takes 1 to 2 months. It’s important to start the process early, as you may need to undergo a medical exam and provide financial documentation.

Q4: What happens if I can’t return to my current occupation due to a disability?

If you have an “own occupation” disability insurance policy, you may still be eligible for benefits even if you can work in another occupation. This is a key advantage of individual disability insurance over group LTD policies, which often have stricter definitions of disability.

Q5: How can I find the right disability insurance for my business?

The first step is to educate yourself about the different types of disability insurance available, like you’re doing right now.  However, since every business is unique, it’s crucial to get personalized advice to ensure you have the right coverage for your specific needs. We’ll help you assess your risks, compare different policies, and create a tailored plan that fits your budget and protects your business.

Take the Next Step: Safeguard Your Business

As a small business owner, you pour your heart and soul into your company. But even the most passionate entrepreneurs can face unexpected setbacks, including disability. Don’t let an unforeseen event derail your hard work and sacrifice. Disability, overhead, and buy-sell insurance offer essential protection for your business, your livelihood, and your future.

Remember, disability insurance isn’t just about protecting yourself; it’s about safeguarding the business you’ve built. By understanding your options and selecting the right coverage, you can ensure your business has the resources to navigate difficult times and emerge stronger on the other side.

At Taxevity, we understand the unique challenges and needs of small business owners. We’ll work with you to create a personalized plan that provides the protection you need, giving you peace of mind and the freedom to focus on what you do best – growing your business.

Don’t leave your business vulnerable. Schedule a free consultation with Taxevity today and take the first step towards securing your business’s future.

Promod Sharma (FSA, FCIA, FEA) and Jeevan Sharma (CFP) YOUR FAMILY TEAM

At Taxevity Insurance, we’re passionate about bringing clarity to complex financial decisions. Let us empower you with personalized strategies to achieve your goals. We focus on life and health insurance solutions to protect your business, your family, and your legacy.