What You Need to Know to Protect Your Small Business if You Get Seriously Sick or Injured
Leaving a corporate job to launch your business often means giving up benefits including disability insurance, a safety net which provides regular income if you are unable to work because of illness or injury. If you’re self-employed, it’s critical to protect your business to make sure it stays healthy, even when you are not.
When considering how to protect loved ones and livelihood, most people automatically think of life insurance – disability insurance often doesn’t cross their minds. The fact is you’re more likely to suffer a debilitating illness that takes you down for more than 90 days than to die unexpectedly before age 65.
Statistics show that slightly more than 25 percent of today’s 20 year olds will become disabled at some point before they retire. And while about 8.9 million disabled workers got assistance from Uncle Sam in 2014, the chances of securing government benefits are not favorable. According to the US Government’s social security statistics, about one third of those who applied were awarded disability benefits, while the rest were denied.
It’s crucial to be proactive and plan ahead for the security of your business. Assess your financial situation and then determine what type of disability coverage is best suited for you and your business. Does your family have resources to cover personal living expenses for an extended period of time? Do you have sufficient cash reserves to run your business and cover day-to-day operating expenses if you suffer an extended illness? If not, consider these disability insurance options:
Short- and Long-Term Disability Policies
A disability policy protects your ability to earn income. Most policies don’t cover your entire monthly income, but typically pay between 50 and 70 percent of your salary for a pre-determined period of time. Most policies have a set definition of what qualifies as “disabled,” which usually includes conditions like cancer, long-term injuries, heart attack, coronary artery disease and debilitating back pain and problems.
When buying a policy, you can choose the waiting period and benefit period that’s best for you. Most policies offer waiting periods of between 30 and 180 days following the start of the disability.
Disability insurance plans and premiums vary widely based on your age, health status, income, occupation, the waiting period and the length of the term you want. Because short-term policies can be fairly expensive for self-employed individuals, it’s probably less expensive and less of a hassle to invest in your own liquid emergency fund for short-term needs, rather than pay a high premium for those policies. However, investing in a long-term policy is prudent and necessary.
Business Overhead Insurance
If your business requires operating expenses beyond what you could pay from your reserves if you were disabled, business overhead insurance would pay the bills to keep your business running without you, or it would provide funds to hire someone in your place. For example, this type of insurance covers payroll, rent and inventory purchases.
You could fund a buy-sell agreement with the proceeds from your disability insurance policy. A buy-sell agreement is a binding agreement between you, the business owner and a second party. If you were permanently disabled, it would be considered a “triggering event” and your buy-out insurance policy would kick in, providing the proceeds for the purchaser to buy out your share of the business.
Make it Affordable
Disability insurance premiums can be pricey. Often you can get more affordable rates with group coverage if you are a member of an association or a professional organization. Examples include:
- AARP Health
- Alliance for Affordable Services
- National Association of Female Executives
- Small Business Service Bureau
- Writers Guild of America
- Freelancers Union
If group insurance is not available or if you need more coverage, check out these strategies to keep premiums within your budget:
- Lower your monthly benefit amount. Most disability policies offer a range of benefit amounts that you can choose from.
- Increase the waiting period before benefits start. Waiting periods can range anywhere from one month to several years. If you decide to lengthen the waiting period, commit yourself to establishing an emergency cash fund that will cover your expenses during that time.
- Shorten your benefit period. Benefit periods usually run from one to five years, often longer. Be careful when limiting the benefit period, though, because you don’t want your benefits to end before your disability does.
- Omit any coverage you don’t need. Check to ensure you’re not paying for optional coverage that you don’t need.
Tips on Finding the Right Policy
- Apply when you’re healthy, don’t wait until you need it. Most policies require a review of medical records, a physical and blood tests before they are issued, so the healthier and younger you are, the better your rates and coverage options.
- Know your average monthly income. Insurance providers will need to know, since they typically set the monthly payout amount based on your previous year’s income. Small business owners often have fluctuating monthly incomes, so take the last three years of income and divide by 36 – that gives a good reference point.
- Comparison shop and talk with several agents. It’s important to compare the different policies’ definitions of “disability” to ensure you choose the one that best fits your needs.
- Consider adding a cost of living addition (COLA) option, which allows for inflation from year to year.
- Review any existing policies you have, such as life and mortgage, and check on the cost of adding a disability rider.
Finding the right disability protection for you and your business may take time and effort, but the peace of mind knowing you’re covered will make it all worthwhile. What are your experiences with disability insurance? Tell us what you think in the comment section below.