Why Is Disability Insurance Important for Business Owners?

For many business owners, the ability to earn an income and the financial success of the business are closely connected.

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A prolonged illness or injury may reduce the owner's personal income while also affecting the business's ability to generate revenue, meet ongoing expenses, service debt, or continue operating as planned.

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Because of this, disability insurance planning for a business owner often involves looking at both personal income protection and business protection.

How Can Business Owners Protect Their Personal Income?

Individual Disability Insurance is designed to help replace a portion of an owner's earned income during a qualifying disability.

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Determining the appropriate benefit can be more complex for business owners because compensation may include salary, business income, distributions, or other forms of earnings.

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Financial underwriting may require tax returns, business financial statements, or other documentation to determine the income that can be considered for coverage.

What Business Disability Insurance Options Should Owners Consider?

Individual Disability Insurance protects the owner's personal income, but it is generally not designed to address the financial obligations of the business itself.

Depending on the business and planning need, several Business Disability Insurance solutions may be considered:

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Business Overhead Expense (BOE)

Designed to reimburse eligible business operating expenses during an owner's qualifying disability, helping the business continue meeting expenses such as rent, employee salaries, utilities, and other covered overhead.

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Buy-Sell Disability Insurance

Designed to help fund the purchase of a disabled owner's business interest following a qualifying disability and satisfaction of the applicable policy requirements.

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Key Person Disability Insurance

Designed to help protect a business against the financial impact of a qualifying disability affecting an owner, executive, or other employee whose contributions are important to the business.

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Loan Protection Disability Insurance

Designed to help address eligible business loan obligations when an insured business owner or borrower experiences a qualifying disability.

Do Business Owners Need Both Individual DI and Business Disability Insurance?

Potentially, yes, because the coverages are designed to protect different financial risks.

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Individual Disability Insurance is generally designed to help protect the owner's personal earned income.

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Business Disability Insurance can address financial obligations associated with the business itself.

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For example, an owner could potentially have Individual DI protecting personal income and BOE coverage helping reimburse eligible business expenses during the same period of disability.

How Does Business Ownership Affect Disability Insurance Underwriting?

Business ownership can affect both financial and occupational underwriting.

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When evaluating coverage, carriers may consider factors such as:

• Ownership percentage

• Business structure

• Earned income

• Length of business ownership

• Occupational duties

• Number of employees

• Existing disability coverage

• Business financial history

• Type and amount of coverage requested

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For business owners with variable income, determining the amount of income that can be considered for Individual Disability Insurance may require additional financial documentation.

Frequently Asked Questions

What type of Disability Insurance should a business owner have?

The appropriate coverage depends on what financial risks need to be protected. Individual Disability Insurance can help protect personal earned income, while BOE, Buy-Sell, Key Person, and Loan Protection coverage can address different business-related risks.

How is income determined for a self-employed business owner?

Financial underwriting for business owners may consider tax returns, business financials, compensation structure, ownership percentage, and other documentation. The income considered for disability insurance may differ from the business's gross revenue.