Types of Small Business Disability Insurance

As a business owner, setting up disability insurance for small business is one of the most important things you can do. For entrepreneurs, proper disability insurance coverage requires more than just taking steps to protect personal income following an injury or illness. Business owners’ need for disability insurance often necessitates three types of disability insurance policies:

  • Income Protection: Professional disability insurance provides personal income protection, providing a percentage of pre-disability income to insured individuals. The benefits you receive under this type of policy are intended to help you meet the expenses of daily living.
  • Business Overhead: In addition to being concerned about personal expenses, entrepreneurs must also take steps to make sure they can continue to pay business overhead expenses following a disability. The best small business disability insurance plans include business overhead coverage, which provides funds to take care of building leases, taxes, staffing expenses, and other operating expenses in the event the owner becomes disabled.
  • Key Person Disability: Many small businesses need the added protection of key person disability insurance. This type of coverage pays benefits to the company if one of the owners or another key person experiences a disability. Proceeds can be used to hire a replacement or an outside firm to handle services the covered individual is no longer able to perform. These types of policies are owned by the business rather than by the insured individual. The business pays the policy premiums, and receives the benefits in the event that the person covered by the policy experiences a disability. If the covered key person becomes disabled, the business will receives either a lump sum payout or monthly payments that can be used to pay the expenses incurred when hiring outside help to take care of the duties ordinarily handled by the disabled individual.
  • Disability Buyout: Do you have business partners? Have you stopped to think about what would happen to your business of one of the owners was to become disabled? Many business partners draft buy-sell agreements that specify what actions should be taken in the event that one or more of the partners becomes unable to work due to a disability. These legal documents also spell out the course of action that will be followed if one of the partners dies.
    In most cases, these types of agreements specify that the partners who will continue to run the business will purchase the affected partner’s stock, either from the individual or his or her estate (in the event of death). When such agreements are drawn up, it’s common for the company to purchase both key person life insurance and disability buyout insurance. This type of disability insurance for business is designed to make sure that funds will be available to execute the buy-sell agreement in the event of a worst-case scenario.
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