Jack Wolstenholm, Nov 17, 2020
This year has not been kind to small businesses. As relief from the CARES Act dries up and further stimulus talks stall in the nation’s capital, more and more small business owners are finding themselves in survival mode.
Right now, the leaner your business can be, the better. At the same time, you understand the importance of protecting everything that you have built, the people who share your vision, and of course, yourself. To ward off financial uncertain3 ty requires reviewing the various forms of insurance you carry — both to identify coverage gaps and to figure out how to fill them.
Types of small business insurance, from general, product, and professional liability to commercial property and auto, are likely among the first to come to mind. But there’s one vital type of coverage that sits at the intersection of every small business owner’s personal and professional lives that cannot afford to be overlooked: Disability income insurance, or simply disability insurance.
Whenever it comes up, questions follow. Here are three that small business owners frequently ask about disability insurance, answered for the COVID-19 era.
1. Is buying an individual disability insurance policy worth it?
It’s the most common question. It’s also a bit misguided.
If you’re a small business owner wondering whether the purchase of an individual disability insurance plan is worthwhile, the real question is an old one you need to revisit for a new reason: How long could I last without a paycheck?
When first starting out, many small business owners forgo their take-home pay to focus on getting up-and-running. However, this is a calculated move that involves a great deal of planning, not to mention small business financing. Loss of income due to an unexpected injury or illness, however, provides no such luxury.
Today, roughly 40% of cash-strapped Americans report being unable to last one month living off of savings before experiencing financial turmoil. Meanwhile, the Social Security Administration reports 25% of working Americans will experience a disabling event that prevents them from working for at least one year before reaching normal retirement age. And the culprits are more familiar than you may realize, too. According to the Council for Disability Awareness, musculoskeletal disorders (back pain, arthritis, joint disorders) and illnesses (cancer, heart attack, diabetes) are the leading causes of long-term disabilities.
Not only does this grim reality highlight the value of income protection provided by individual disability insurance —it also answers the question at hand. If you become too sick or hurt to work, the policy will function as a financial safety net that is both personal and portable. Any monthly benefits you will receive will be treated as tax-free income that can help you meet your financial obligations, between paying bills and providing for loved ones, while you recover. That’s worth every penny in premium.
2. Can I afford to offer group disability insurance to my employees?
Most years, it’s a mundane routine. Employers decide what they can and can’t afford to offer; employees sift through handouts littered with insurance jargon before coming to their decisions. But this time around, both sides realize no benefit can be taken for granted.
Even the most comprehensive health insurance plan won’t supplement the income an employee loses due to a disabling event. This, along with the fact that workers’ compensation only covers on-the-job accidents, is why group disability insurance is a valuable tool for both recruitment and retention.
First and foremost, the ability to offer group coverage depends on the number of people you employ. A group disability insurance plan through The Hartford, for example, requires at least 10 employees. (This varies by carrier.)
From there, it comes down to cost. Estimates from the Bureau of Labor Statistics (BLS) show the cost per employee participating in a group disability insurance plan can range roughly from $10 to $36 per month, depending on the occupation classes of the workers. As a small business owner, this is especially important since the employer typically foots the bill. In 2018, BLS found employers paid the full cost for 85% of private industry workers with group short-term coverage and 94% of those with group long-term coverage.
If you are able to sponsor a group plan, be sure to educate your employees about its limitations. Group disability insurance plans are contingent upon employment and have a stricter definition of disability. Benefits are also capped and taxed.
3. Short-term vs. long-term disability: Which is the best way to get each?
Every small business owner should consider purchasing individual disability insurance. If your business employs enough people and you can afford it, it certainly wouldn’t hurt to protect your employees with a group plan either.
In both cases, the coverage can be short-term or long-term. So, which is the best way to get each? Although there’s no definitive, one-size-fits-all answer, long-term disability coverage is typically recommended in the form of an individual plan; short-term disability, through participation in a group plan. Why?
Long-term disability insurance is designed to cover serious conditions for an extended period of time. This could mean for up to 10 years — or simply until age 65 or 67. Given what is known about the chances of becoming disabled, the leading causes of disabilities, and the average length of disability claims, this is not something that should be contingent upon employment. As an individual policy, long-term disability insurance becomes portable, meaning it goes wherever you go. It can be also personalized to better reflect your unique financial situation.
Short-term disability insurance is ideal for temporary conditions that may keep you out of work for several months — potentially up to a year. Again, based on what we know about disabling events and their financial impact, this coverage can only help you so much. If you switch employers or the group plan is canceled, you can afford to lose it. In fact, a healthy emergency savings fund equal to three to six months of income can serve as a viable substitute for those who do not have access to short-term group coverage. The same cannot be said for a long-term disability insurance.
Ultimately, long-term and individual disability insurance are typically “must-haves”, whereas short-term and group disability insurance are typically “nice-to-haves”. When paired as such, they combine the best of both worlds, providing the maximum amount of income protection available for you and your team.
You’d be easily forgiven if insurance is the last thing on your mind right now. But even in the chaos of 2020, the matter still needs to be addressed sooner or later.
For those who are eager to get their individual and group disability insurance needs squared away, now is the perfect time to strike. It’s also worth mentioning there’s also key person and business overhead expense coverage to evaluate. (One step at a time though.)
If this pandemic has proved anything, it’s that the best way to prepare for the worst is when life is good enough to take meaningful action. Wait until something bad happens, and it may already be already too late.
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