Insurance Basics for Business Owners-Part 2: Disability

This article was Co-authored by <a href="http://biznik.com/members/sarah-bitter">Sarah Bitter</a> and <a href="http://biznik.com/members/chris-lavin">Christopher Lavin</a>. It is the second in a series of <a href="http://biznik.com/learn/articles/insurance/insurance-basics-for-business-owners-part-1">articles</a> about insurance for businesses and business owners.Although most business owners recognize that disability insurance might be a good idea, most have never purchased disability and have many questions. Among them:I haven’t missed a day of work in years. Why is purchasing disability insurance necessary?As stated in our <a href="http://biznik.com/learn/articles/insurance/insurance-basics-for-business-owners-part-1">first article</a>, disability is the largest risk to any small business owner. In fact, Americans between the ages of 35 and 65 have a one-in-three chance of becoming disabled for more than ninety days in their lifetime. To put this is perspective, a thirty-five year old is more likely to become seriously disabled before age sixty-five than they are likely to die. The question to ask yourself when determining if you need disability is: how would I cope without any income for an extended period of time? If you are curious how long you could survive without disability <a href="http://www.halfapaycheck.com">click here</a>.If I get hurt while I’m working I have insurance, right?If you are an employee, you probably do; if you are not an employee, you probably don't. Most employees are covered while they work by Labor and Industry Insurance (commonly termed L&I). L&I is on-the-job disability insurance coverage which companies are required to purchase for their employees. Self-employed people, as well as the owners of businesses who are not employees, can <a href="http://www.lni.wa.gov/Forms/pdf/213042a0.pdf">elect to be covered by L&I</a>. If self-employed workers or small business owners decide to insure their income, they must purchase their own disability insurance. They can purchase L&I but they might want to purchase additional coverage for business overhead and for off-the-job injuries. (L&I is not terrifically useful for a desk jocky, but great for a dance teacher.)Why doesn’t my disability insure 100% of my business income?Typically, for a business owner or a self-employed person, a regular disability policy will insure only your net income. That is, it will insure your income after deductions for business expenses. As many business owners perceive, this is not enough to cover both their income and their overhead. It is possible to insure your business overhead and for many business owners this is a good idea. Let’s consider the case of a salon owner whose business generates $ 100,000 in sales and who wishes to insure as much of that $100,000 gross income as possible. Her overhead is approximately $35,000. A regular disability policy would start considering payment on $65,000. An “overhead” policy would consider payment on the $35,000 in business expenses. If this business owner wants to insure both her net income and business overhead she needs to put two separate policies in place. This is very important for business owners who have employees and/or inventory and would like their businesses to survive their disability.I became disabled and my disability policy didn’t pay…why?The most common explanation is that your disability policy defines disability as: something that prevents you from performing the duties of any occupation, not just your own occupation. We recently met a massage therapist whose disability claim had been denied for what she thought was no good reason. However, when she purchased disability, she had selected a policy that stated if she were unable to work in any occupation the policy would pay. Unfortunately, although her injury prevented her from working as a massage therapist it did not prevent her from working as, for example, a telemarketer; therefore, her policy did not pay.Therefore, for a small business owner, when purchasing a disability policy the definition of disability is the most important consideration. Most of us, especially those of us who own our own businesses, would consider ourselves disabled if we could not continue in our current occupation due to disability.Should I pay for my disability policy with pre or post-tax dollars?Although paying anything pre-tax is always appealing, it is usually not advisable to use pre-tax money to pay for disability because you would be taxed on the benefits. In other words, you would have an even smaller paycheck when you needed it most.What are the advantages or disadvantages to group disability?The big advantage is easier underwriting – generally speaking it is based on age and income of population. That is price an insurer will charge for disability will be based simply on how old the people in your company are and how much money they make. There will not be as much, if any individual medical underwriting. However, group disability does require having a certain minimum number of employees and a certain level of participation.How long does it take to get a disability policy?That depends. A three- to six-week timeline is typical for individual disability. The first step is meeting an agent and selecting a policy that meets your and your business’s needs. Then, the application itself will require health and income verification. Can everyone get a disability policy?No. Disability, especially individual disability involves an underwriting process similar to applying for life insurance. Insurers will consider your health and medical history, as well as your income history. The cost of disability insurance is also related to the risk of disability of your occupation. Dancers and electricians pay a lot for disability coverage. Aslo, people starting in industries with highly variable incomes (real estate, for example) may find it challenging or, impossible to get disability for the first couple of years. An MD entering private practice would not have the same problem.SummaryA disability could destroy your business and your family’s finances if you do not have disability insurance. Nearly half of the million people who filed for bankruptcy in 1999 did so after being sidelined by a disabling illness or injury. (New York Post, April 3rd, 2000.) Insurance professionals see a lot of disability claims, but a lot more entrepreneurs who have no disability insurance at all. Given the very high incidence of disability, one of the most profound investments you can make in the stability of your business is insuring your income and your overhead.DISCLAIMER: The information provided in this article is for information purposes only. If you have insurance questions, please seek the advice of a licensed insurance professional.\ 2008-04-24T19:42:22Z

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insurance-basics-for-business-owners-part-2-disability

2008-04-30T06:06:48Z

Disability is among the largest risks business owners face; on average one in three people will be disabled for before age 65. In this article answer common queries about disability insurance and link to tools for analyzing your needs.

Insurance Basics for Business Owners-Part 2: Disability

2009-02-24T09:44:09Z