Disability Income Insurance for Business Owners

May 8, 2023 |read icon 8 min read
Three warehouse employees looking at a laptop.

The need to plan for an unexpected illness or injury is real and your efforts to educate and guide business owners through the planning process are often necessary to get them to act. Business owners understand the importance of cash flow. Explaining the effects disability can have on cash flow can help them understand the importance of disability income insurance for their business.

An advantage of working with business owners is the number of sales opportunities it creates. Business owners may see the advantage of offering their employees a plan, giving you prospects from the entire workforce. If they are not interested in providing their employees with coverage, they may still see the importance of individual coverage for themselves.

Your existing block of business is a key market for sales opportunities for disability income insurance for business owners. It helps that you’ve already established a trusted relationship with them. It also helps you create a holistic approach to your business by exploring all a client’s protection needs. Key clients to target include those business owners you’ve helped fund a buy-sell agreement or helped develop personal protection strategies using insurance.

A personal need for business owners

Just like anyone, a business owner will need money to meet normal personal expenses and other ones that may arise if they experience a disability. Personal expenses often go up, not down, during a time of recovery. Designed to replace 60% or more of income to help pay bills, mortgage payments and other critical expenses—individual DI insurance allows the business owner to take less money out of their business at a vulnerable time and still help preserve their standard of living.

What is business overhead expense insurance?

If a business owner becomes disabled, the business’s fixed expenses, such as rent, utilities, employee wages and debt payments continue even though the owner’s revenue-producing abilities are gone. Disability Income Insurance for business owners helps your clients pay daily expenses and bills. It’s critical to show your business-owner clients what business overhead expense insurance, also known as BOE, is and how it can provide the cash to help their business survive if they experience a disability.

The essential part in most small businesses is the business owner. It’s the owner who holds the company together and keeps it running. If the owner becomes too sick or hurt to work, it could be detrimental to the business. Besides the normal monthly expenses of employee salaries, rent or mortgage payments and other company expenses, the owner may also need to consider hiring a temporary replacement to keep operations going.

Business owners have a great need for revenue to help keep the business doors open if they become too sick or hurt to work. BOE insurance is designed to reimburse small business owners for normal and customary expenses necessary to maintain their business if a sickness or injury prevents them from working. BOE has some significant advantages in the marketplace:

  • Few individuals sell BOE.
  • The product is relatively inexpensive compared to other disability products and has tax advantages.
  • Allows you to focus the interview and discussion not only on the immediate needs of the business, but also the needs of the owner and any employees.

BOE insurance is for medical/dental professionals and small business owners who are engaged in their business full-time. The day-to-day presence of these business owners is vital to the business. Not being able to work due to a disability would mean a loss of revenue to the company or practice. These businesses have a great need for income to keep the doors open and keep current customers or patients if the owner would become disabled. In addition:

  • Policy provisions can handle the variable nature of business expenses. Since many expenses can vary monthly, BOE is designed to address those fluctuations throughout the disability.
  • Premium on a BOE policy is tax-deductible to the firm as a normal business expense. While benefits received are treated as income, the income is used to pay covered expenses, generally resulting in net tax-free benefits.

Another market: disability income insurance for employees

Another type of disability insurance for business involves coverage for the employees. A business’s key employees need cash too, if they become sick or hurt and can’t work. While salaries are vital, so is the need for income if a serious sickness or injury keeps them from working.

A Salary Continuation Plan can help an employer identify if they will pay employees if a disability occurs. The plan is a written document that sets out the plan parameters. While it does not have to be insured, usually it makes economic sense to use insurance as the funding vehicle because the premiums are deductible to the business. Your role is to show business owners how and why they should develop and implement a salary continuation plan prior to any disability occurring.

Smaller firms with active owner managers will be more likely to see the advantages of a salary continuation plan to insure themselves and other key employees against disability, while using the tax code to their advantage.

A disability salary continuation plan is a corporate sponsored benefit generally designed to replace part or all an executive’s income, in case of his or her disability. The benefit plan is generally exempt from ERISA and typically is confined to a select group of highly compensated employees. Many employers might want to continue to pay a disabled employee while he or she recovers. However, doing so without having a bona-fide salary continuation plan in place prior to the disability can create problems for the business:

  • The IRS could view the arrangement as a settlement and not as salary, so the business could lose the ability to claim the payment(s) as a tax-deductible expense.
  • Without a plan detailing the participants, the business might be subject to discrimination claims.

To fund or self-insure the plan

Once a salary continuation plan is in place, the plan is automatically considered “funded” by the employer, whether funding exists or not. If the plan is uninsured, the entire responsibility of funding falls on the business. Depending on the business, an unfunded salary continuation plan could be devastating to the business. In addition to continuing a disabled employee’s wages, it is likely that the employer may have to hire a replacement worker. In other words, the employer may have to pay two paychecks.

Self-funding the disability income insurance plan also puts the employer in the potentially difficult position of having to make claims decisions. Not only does the employer have to decide if the employee is disabled, but the employer also must figure out when they feel the employee can come back to work. The most difficult situation is when the employee and the employer disagree on the prognosis, the claim, return to work or length of disability. Imagine an untrained business owner or human resources representative having to make those judgments calls or handle the communication of an unpopular decision.

Salary continuation planning allows you to work with business owners and show them how to use well-established IRS rules and regulations to their advantage. It allows you to advise the employer on ways to supply meaningful benefits within their budget. The use of insurance shifts the responsibility for deciding the claim validity from the employer to the insurance carrier. This provides financial support as well as initial and ongoing claim administration and service to the disabled employee.

Consider guaranteed standard issue

Guaranteed standard issue disability income insurance, also known as GSI, is a long-term multi-life disability insurance option designed to provide disability insurance for employees. It can conveniently and affordably provide coverage to all or only specific employee groups.

Offering disability income insurance for employees through a GSI program offers employers a cost-efficient way to fund their salary continuation plan. In addition:

  • Applicants who meet eligibility requirements receive a policy with no medical exclusions.
  • Policies are individually owned and portable.
  • No medical exam is needed. Each employee answers a few medical questions on the application.
  • Employees don’t need to supply financial documentation. A complete census provided by the employer is all that is required.

Disability income insurance for business owners keeps businesses running

If a business owner client became disabled and couldn’t manage their company, they’d need money to keep their personal finances in order. They’d also need to make sure that their business continues to run smoothly. That’s where disability insurance for business comes in. Disability income insurance offers protection for personal income, coverage for business expenses and an important benefit for employees.

Learn more about disability income insurance offered by Ameritas.

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