The Small Business Owner’s Guide to Income Protection

Tough competition. Losing your biggest client. Not enough capital. These are just a few of the professional risks of self-employment that can threaten the success of your business.

Then there’s the possibility that something could happen to you personally.

If you were diagnosed with cancer, severely injured in a car crash, or suffering from depression, how would your business fare? And what would you do without a steady stream of income while you are out of work?

That’s where disability insurance for self-employed individuals comes into play. Here’s what small business owners need to know about protecting their income with this type of coverage.

Preparing for the Unpredictable

Whether it’s three weeks, three months, or three years, any period of time in which you are unable to  work can have a negative financial impact  on you personally and professionally. The two main types of disability insurance, short term and long term, account for this.

Disability insurance is protection for your income. It supplements lost paychecks you can no longer earn due to a disabling event. Without it, you may need to hire a temporary replacement or even close your business. This can spur financial hardship both personally and professionally.

Short term disability is typically for temporary, less serious conditions that people generally recover from. On the other hand, long term disability insurance covers serious ailments lasting several months, years, or even permanently.

For business owners, the former is nice to have; but latter is a must. With long term disability, how long you can receive benefits if you become disabled typically ranges from two to 10 years or longer. You might also choose to receive benefits up to a certain age, typically 65 or 67.

The need for a short term disability policy isn’t as cut-and-dry though. In most scenarios, it may be just as expensive as long term coverage, but provides less benefits for a shorter period of time. Plus, people are most likely to recover from disabilities that warrant short term policy benefits.

If you can still work in some capacity with a short term disability, you may not need this coverage at all. Instead, consider setting aside an emergency savings fund in case you miss work for a few weeks or months.

Group and Individual Coverage Are Better Together

Disability insurance is offered in two main ways:

• There’s group disability insurance.
• And there’s disability insurance for individuals.

Group coverage insures a large group of people, such as employees of a company or members of an association. Participants in group disability insurance policies are often enrolled automatically, simply by opting in. Members may pay all, some, or none of the cost. The sponsor of the group plan then pays whatever the member doesn’t.

As a business owner and employer, you may want to consider offering this coverage depending on the size of your company.

But even if you have group coverage, you still should strongly consider getting your own individual disability policy.

An individual disability insurance policy is personalized to fit your unique financial needs. You own the policy, so you pay the full premium amount. Because the insurance company takes on more risk in insuring you, this means you will likely need  to go through underwriting.

Here are several reasons why business owners need individual coverage regardless of the group coverage:

• Group disability insurance benefits  are limited by a cap, especially if you are a high-income earner.
• Due to financial underwriting, individual disability insurance policies can better reflect the total amount income that business owners earn on an annual basis.
• If your company struggles, you may have to discontinue its group coverage. However, your individual disability policy is portable and will stick with you as long as you keep paying premiums.

Of course, the best case scenario is to have both types of coverage. Together, individual and group coverage can ensure you have as few gaps in your income protection as possible.

What Does It Cost to Protect Your Income?

Typically, you can expect to pay from 1% to 4% of your income for an individual disability policy. Another rule of thumb is that you will typically spend between 2% and 6% of your policy’s monthly benefit amount.

Of course, you may pay more or less than these estimates depending on your unique risk profile.

As with all types of insurance, the cost of disability insurance  depends on the chances of claiming benefits. There are a number of factors insurance companies use to determine your risk of becoming disabled. These include:

• Age: Cost increases with age.
• Gender: Women face a higher risk of disability, so they pay more men (all other factors equal).
• Health: The healthier you are, the lower your rates will be.
• Occupation: How risky is your job?
• Income: The more you earn, the more you have to insure.

Aside from these personal and professional factors, your policy choices will also influence the price you pay each month. Your benefit amount, benefit period, and waiting period, along with any additional riders you select, will all impact your monthly premium rates.

Don’t Forget About Business Overhead Expense Coverage

A personal disability policy helps replace your paycheck. But what about everything that goes into running your business?

Enter business overhead expense (BOE) insurance.

BOE coverage will help pay your monthly business expenses if a disability limits your ability to work. You can bundle BOE coverage with your individual disability policy or purchase it in the form of a standalone policy.

BOE policies typically only cover the cost of business overhead, such as employee salaries, rent/mortgage, taxes, utilities, and equipment maintenance. The amount the policy pays in benefits will depend on your company’s monthly overhead expenses, up to a cap.

If you’re part of a partnership or multi-owner corporation, this policy is intended to take care of your share of expenses. This is typically determined by what percentage of the business you own on the date that the disabling event occurs.

Key Takeaways

Running a business is hard work. It always has been and it always will be, no matter how far technology evolves. And the current challenges presented by a global pandemic and the resulting economic downtown certainly don’t help.

But it’s uncertain times like these that serve as a reminder that anything can happen to anyone at any time. Preparing for what could go wrong is vital to long term success, both in life and in business. Whether or not you have sufficient disability insurance coverage could ultimately be the difference between you and your business staying afloat and going under. When you have a little spare time, use it to compare disability insurance quotes and review your options. Better safe than sorry.

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