Coulda/Shoulda/Woulda: Disability Insurance and the Business Owner

Most clients do not expect to have an in-depth discussion about disability insurance with their wealth management advisor.  It seems reasonable to assume that disability insurance is a topic better suited for an insurance professional.  However, if you own a small business – and shoulder the accompanying risks and responsibilities of doing business in these challenging times – examining the nuances of disability insurance and understanding the part it plays in your comprehensive financial management plan is absolutely a conversation your wealth management advisor should have with you.

This question-and-answer article is designed to help small business owners better understand the disability insurance/wealth management relationship.

Why am I discussing disability insurance with my wealth management advisor?

As a small business owner navigating today’s particularly challenging entrepreneurial and economic environment, you appreciate that your current and future wealth/financial security is directly related to you being able to competently manage and lead your business.  But what if you couldn’t?  Being unable to manage your business for any significant amount of time could spell disaster for your business and your family.  It is possible that your business might never recover if you suffered a severe, prolonged disability, completely derailing even the best laid wealth/financial plans and strategies.   It is totally appropriate, and we believe it is incumbent upon your wealth management advisor to discuss the various types of disability insurance as part of developing your comprehensive financial strategy/plan.

How does disability insurance fit in my wealth management plan?

A comprehensive wealth management plan includes addressing the risks that can endanger or potentially derail even the best laid plans.  The risk of being disabled is prominent among such risks and must be acknowledged and addressed.  More than one in four of today’s 20 year olds can expect to be out of work for at least a year due to a disability before reaching retirement¹. Your wealth management advisor should review all your insurance policies, including personal and business policies.  It is critical to address potential risks to your plan and incorporating an evaluation of your insurance needs is an integral part of any truly comprehensive, thoughtful plan that is geared to securing your overall financial success.

When should I discuss something like disability insurance with my wealth management advisor?

Most likely, such a discussion will be initiated during the “getting-to-know-each-other” phase.  Your wealth management advisor will want to get a complete snapshot of your financial situation.  Disability insurance should be included in the data gathering phase and a detailed review will be included in the development of your comprehensive wealth management plan.   This topic should be discussed early in the client-advisor discovery process.

Who benefits from disability insurance?

As a small business owner, the obvious immediate beneficiaries of a disability insurance plan are you and your family.  Of course, you want to take care of them if something were to happen to you.  They are your primary concern, and rightfully so. However, your immediate family is not the only individuals you should be thinking of when you examine disability insurance options.  Likely, you have employees … and they have families. You depend on your employees to help your business be successful, and they look to you for employment and security.  It is likely that you feel a deep sense of responsibility for your team and their families.  They need you as much as you need them. Having an appropriate disability insurance plan can help reduce the stress of being responsible for both your family and your employees and their families.

What types of insurance should I consider?

There are two important types of disability insurance for a business owner to invest in:

Disability Income Insurance – covers your lost wages when you become disabled. Such policies can be purchased individually or by the business.   If purchased by the business, disability coverage is typically purchased as a Group Insurance Policy and covers all qualified employees.  Typically, such coverage involves pairing a short-term disability benefit that replaces salary for a period of up to six months with a long-term disability benefit that begins when the short-term benefit ends.   Short-term disability typically covers 100% of salary.   Long-term disability benefits in a group plan typically cover 60% of salary (sometimes including commission and bonuses) for a period of time established by the policy.

Disability Overhead Insurance – covers the costs of running your business when your absence due to a disability means those costs would go unpaid.  Covered expenses include wages, excluding your own wages and profits, but including the wages of a temporary replacement for you.  Office expenses, debts, rent or mortgage payments, insurance premiums.  Business overhead expense coverage to help cover your fixed monthly business expenses such as employee salaries, rent, utilities, taxes, business loan interest, and maintenance.  The monthly benefit amount should reflect your true costs and expenses, and the policy premium, varies depending on the size of your business and the specific details of your costs/expenses

Does disability insurance cover all my financial needs?

To purchase/compose a meaningful disability policy for your specific situation, you need to have a firm grasp of your expenses and cash flow.  With the help of your insurance professional and your wealth management advisor, it should be possible to construct a policy that will adequately meet the financial needs of all parties if anyone were to get injured or become ill.

A well-written policy should allow you to look to the future with confidence until you (or a team member) recover and are able to work again, be it short- or long-term.  In extreme situations where the business owner is unable to return to work (permanent disability) disability and disability overhead insurance can help keep the business and your family finances intact, giving your family the time and space to sell the business and maximize its value.

Can I purchase insurance from you?

While your wealth management advisor certainly will be knowledgeable in this area, as fiduciary investment advisors we do not sell insurance or any other financial products.  Your wealth manager can help you engage the right professional and can help you determine, evaluate and secure appropriate disability insurance coverage.  This person will become another valuable member of your professional advisory team and work in conjunction with the overall team to ensure you are efficiently and effectively protected and on a clear path to business and personal financial security.

A Complete Picture

To get the most benefit from your relationship with your wealth management advisor, he or she needs to know as much about you (and your business) as is realistically possible.  Any factor that can potentially impact your path to financial security – such as disability insurance for a small business owner – should be a topic of discussion with your advisor.  Open communication about your complete picture is the only way to create a meaningful comprehensive financial plan for you and your family.

If you have additional questions or would like to have a conversation, we welcome your call.

Disability Statistics