Disability Insurance for Business Owners

Disability coverage might be the least understood and most neglected area of business planning. Most people understand that it’s important to prepare for a possible death, but rarely do they imagine that a partner or key employees will become disabled. Yet disability can be a lot more damaging to a business than death, and it’s much more likely to happen.

Over the course of a career, people are almost four times more likely to get injured or disabled than they are to die.’ That makes it incumbent upon advisers to ensure that their business-owner clients have the disability coverage they need.

Consider a scenario in which you and I are in business together as partners, and one day I go skiing and fly right off a cliff. Suddenly, I’m seriously injured or even permanently disabled. I’m not adequately covered by disability insurance, and neither is the business. You break the news that you can’t afford to keep me on. I still own shares, but you don’t have the money to buy me out. I’m out of luck, but so are you. All you can do is hope that when the time comes to make critical business decisions, I vote your way.

That’s the kind of situation that all business owners want to avoid, but not many are aware of the disability insurance solutions available to them.

There are two types of disability insurance that advisers should recommend to almost every business-owner client: key person disability insurance, which pays the business to replace the individual who is unable to work; and personal disability insurance, which provides an income benefit to the disabled partner/owner. While you might get pushback from clients initially—no one likes to think they’re going to be disabled—but once you run through a few “what if?” scenarios, most clients start to understand how badly disability can damage a business financially.

There are two more types of disability insurance that advisers should be aware of, which can be critically important for some, but not all, businesses. The first is buyout disability insurance, which could pay the disabled partner/owner for their shares in the business. That’s not necessary if you have a sole proprietorship, for example.

Second, there is disability insurance for overhead. This pays for operational expenses or salaries, depending on the business. It is especially useful for the owners of startup companies, which might otherwise have trouble paying the rent, keeping the lights on or retaining staff when an owner can’t work.

For a young and vibrant business owner, it’s hard to imagine that a disability could ruin their business. On the flip side, for an adviser, bringing up disability can be uncomfortable. Yet since so few business owners have taken out proper coverage, it’s a way for you to add value immediately.