Best Disability Insurance for Small Business Owners

Small business owners need disability insurance to protect their personal income and business expenses in case of disability.

Key Terms

  • Small business owners need long-term disability insurance to protect their personal income.
  • You can pay employees when you become disabled when you have a business overhead disability policy.
  • A business overhead expense policy can pay for ongoing business expenses, and is best used in conjunction with an individual long-term disability coverage.

As a small business owner, you work hard to build and grow your business, but what would happen if a severe injury or illness left you unable to work? That’s where disability insurance comes in; it can help protect your income, and your business, in the event that you become disabled. 

While an individual disability insurance can help protect your personal income, you’ll need another type of policy, business overhead disability insurance, to protect your business expenses, including your employee’s wages. 

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Why is disability insurance important for small business owners?

As a small business owner, you are responsible for your own financial well-being as well as that of your business. Disability insurance can protect both.

Personal income protection: When a chronic illness or injury renders you unable to work, disability insurance can help you maintain your personal income and cover your living expenses. Disability insurance pays out a benefit that’s roughly equivalent to your take home pay, which you can use for expenses, debts, and more. Without disability insurance, you may have to rely on your savings or other financial resources to make ends meet, which could be difficult if you are unable to work for an extended period of time.

Small business owners who get a policy with an “own occupation” definition of disability, will be considered disabled if they’re unable to work in your specific occupation. That means you can receive benefit payments even if you could work in another occupation or industry, and it’s especially important for business owners who may not have the skills or experience to easily transition to a different type of work (or don’t want to).

Business income protection: If you are unable to work due to a disability, your business may suffer as a result. There are specific disability types policies for business owners that can help their business keep running by providing financial support to cover expenses, such as employee salaries, rent, and even related business loan payments.

How does short-term DI work for small business owners?

Short-term disability insurance is a type of policy that provides income protection for a limited period of time, usually several weeks or months, if you are unable to work due to a disability. It’s usually not worth the cost, but it can be a valuable resource for small business owners who may not have a lot of savings or extra cash on hand to cover unexpected expenses for a temporary period of time. Long-term disability insurance is more robust and worthwhile, since it can last for years, even decades until you retire. 

As a small business owner, you’ll also need to think about providing disability coverage for your employees. Payroll taxes of course help fund Social Security Disability Insurance, but a handful of states require employers to provide temporary disability benefits to their workers, too. 

Additionally, small business owners may want to consider buying into group coverage; as long as there are at least two employees (which can mean you, the business owner, and one other employee) you can qualify for buying group disability insurance plan to provide short-term benefits.  

Can I get disability insurance as a small business owner?

In order to qualify for long-term disability insurance as a small business owner, you’ll need to prove that your business has been profitable for at least 2 years with appropriate documentation (typically tax forms). 

If you’ve been a small business owner for less than two years, you may still be able to get a disability policy if your business has high income potential — such as when you’re a lawyer, surgeon, or other high-earner. It will also help if you have signed contracts to show your future business income, and you’re not switching industries (meaning your business is in the same industry as your previous full-time job).

The best way to ensure you get covered is to purchase a long-term disability policy before you start your business, while you’re fully employed. As long as you have a policy that is non-cancelable and guaranteed renewable, you’ll be covered as long as you keep paying the premiums.

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How to get disability insurance as a small business owner

Here are the steps to getting a disability policy:

  1. Determine your needs: Decide your benefit amount and how long you want to receive benefits for by considering your age, health, and the type of work you do, as well as your financial situation and the financial stability of your business. 
  2. Shop around: There are many different disability insurance policies available, and it’s a good idea to compare a range of options and quotes. 
  3. Apply: You’ll need to provide basic personal and financial information, including your gender and occupation on your application.
  4. Have a phone interview and medical exam: The insurance company will verify your physical and financial health, by requesting a doctor’s statement and tax documents respectively.
  5. Sign the policy: You’ll be issued a policy once you’ve completed the underwriting process. Carefully review the terms and conditions, including exclusions and limitations. 

Talking with an experienced insurance broker to help understand your options. They can be a valuable resource in ensuring that you get the right disability insurance policy to protect your income and your business.

Can I pay small business employees with disability insurance? 

Your individual long-term disability insurance policy won’t allow you to cover expenses related to your business. It’s meant to protect your personal income and your finances if you become disabled. If you’re worried about being unable to pay your employees during a period of disability, consider purchasing business overhead expense insurance.

Business overhead insurance (BOE)

Also known as business overhead disability insurance, this policy can cover the business’s fixed expenses, including rent, utilities, payroll, and other necessary costs to keep the business running. “A business overhead policy can help keep the lights on,” explains Pradeep Audho, a licensed insurance broker with over 20 years of experience. “It can also cover the cost of hiring temporary help or making necessary adjustments to accommodate the owner’s disability.”

Business overhead expense insurance can be purchased by small business owners as an add-on to their disability insurance policy. It’s important to note that this policy is not a substitute for long-term disability insurance, but a supplement.

Additional disability policies geared toward small business owners

Here are some a few more insurance policies owners might consider to protect their business:

Buy-sell agreement funding: This type of policy is used in conjunction with a buy-sell agreement, which is a legal agreement that outlines the terms of the sale of a business in the event of the owner’s death or disability. Buy-sell agreement funding can provide the necessary funds to buy out the disabled owner’s share of the business.

Key person insurance: This type of policy covers the income of a key person in your business, such as a partner or top salesperson, if they are unable to work due to a disability. It can help protect the financial stability of your business in the event of a key person’s disability.

Business loan protection:  “If your main concern is being able to pay back a business loan, consider a loan protection policy,” says Audho. Some insurance companies offer this as a separate policy or add-on to a business overhead policy.

Talk to an independent agent

Joshua Holt is a licensed insurance agent (License #2785989) and founder of Biglaw Investor and Sidebar Insurance LLC, an insurance agency created by lawyers, for lawyers. His insurance expertise lies in the areas of life and disability insurance, particularly covering lawyers, doctors and other high-income professionals. Prior to Biglaw Investor, Josh practiced private equity mergers & acquisition law for one of the largest law firms in the country.

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