According to Council for Disability Awareness, the chances that a working person will experience a disability are high.
For example, a female, age 35, non-smoker with an office job has a 38% change of becoming disabled during her working career for 3 months or longer, and there’s a 38% change the disability will last 5 years or longer.
The odds increase for someone with poor health habits, such as smoking and being overweight. Yet only about half of working people have even thought about or discussed disability and what its financial impact would be.
For business owners, this oversight can be devastating — to the business and to the owner’s family.
Protecting your business
Do you have a contingency plan for your business if you become unable — for a short period or long term — to run it? Here are some key questions you should be asking?
- Can I continue to pay my staff? A business overhead expense (BOE) disability insurance policy pays your rent, utilities, and other costs, including your payroll, if you become disabled.
- Who will run my company? Are there managers, relatives, or co-owners who can carry on in your absence? Do you have written agreements to this effect, such as a clause in your partnership agreement or a shareholder agreement if you co-own a corporation?
Protecting your income
What happens to you and your family if you aren’t collecting a paycheck or taking a draw on account of disability? There are some income backstops to replace income in case of disability:
- State funds (called temporary disability insurance). California, Hawaii, New York, New Jersey, and Rhode Island provide what amounts to short period paid leave for disability.
- Short-term disability coverage from private carriers.
- Long-term disability through the Social Security Administration
- Long-term disability coverage from private carriers
- Workers’ compensation
- Veterans benefits
The period of benefits and amount of income varies considerably with the type of disability income replacement. Social Security benefits may not be a meaningful income replacement, and eligibility for such benefits can be difficult. Income from state funds and workers’ compensation are only available to employees, so self-employed individuals (including independent contractors) should focus on options through private carriers.
There are two tax-related considerations with disability insurance: whether premiums are deductible and whether benefits received under the policy are tax free. Understanding the tax rules and planning ahead can ensure the more favorable tax treatment for you.
Premiums. If your business is incorporated and it pays the premiums for your disability policy, the corporation, and not you, can deduct them. This is a tax-free fringe benefit to you. If you pay the premiums personally, you cannot deduct their cost; this is a nondeductible personal expense.
Benefits. If the corporation has paid the premiums and you collect benefits, you are taxed on them. If you paid the premiums for coverage through your company or under an individual policy and collect benefits, the benefits are tax free to you. If you have the option to pay premiums for company-obtained coverage, you may want to do so in order to nail down tax-free benefits if you become disabled.
Where to find coverage
Most major carriers offer disability coverage, both individual policies and group coverage. Find a list of the best disability carriers here.
You may obtain more favorable (group) rates for your personal coverage by buying coverage through a trade or professional association. It may be worth the annual association dues just for this benefit.
Don’t wait for disability to happen to you or someone vital to your business; think about it now. Find more information about short-term and long-term disability insurance from the Insure U.