According to the U.S. Census Bureau, 20% of new businesses fail within the first two years and only 35% will survive for a decade.
While there are endless reasons why a small business can fail, there is one recurring theme that those that do not succeed often share — failure to prepare for the unexpected.
So, how exactly should new business owners prepare for the unexpected? In addition to essential forms of coverage like general liability and commercial property insurance, there are also various types of disability insurance for small business owners to consider, such as:
- Individual disability insurance
- Group disability insurance
- Business overhead expense (BOE) disability insurance
Here's what you need to know about disability insurance for business owners in 2021.
Oftentimes, people enter self-employment in search of the freedom and flexibility that comes with being your own boss. But what happens if you can't work, be it temporarily or permanently?
The Social Security Administration reports that one in four working Americans will experience a disabling event that prevents them from working for a year or more before reaching normal retirement age. In fact, you actually have a greater chance of becoming disabled than you do dying during your working years.
First things first — small business owners need the personal income protection offered by an individual disability insurance policy. When shopping for individual disability insurance coverage, small business owners have two main options:
- Long term disability insurance will replace a portion of your income if you experience a serious injury or illness that keeps you out of work for an extended period of time. This includes permanent disabilities that leave you unable to return to work. Leading causes of long term disability claims include cancer, heart disease, diabetes, and musculoskeletal disorders. Waiting periods may range from 30 to 180 days and benefit periods may last two, five, or 10 years, or until age 65 or 67.
- Short term disability insurance will replace a portion of your income if you experience an injury or illness that only prevents you from working temporarily. It is ideal for disabling events that may limit the ability to work, but people generally recover from, such as a fractured wrist or a healthy pregnancy without complications. Waiting periods may range from one week to one month and benefits periods may last from three months to six months (sometimes up to a year).
As you can see here, long term disability insurance provides far more comprehensive coverage than its short term counterpart. Although this naturally makes it a bit more expensive, long term disability coverage is actually more cost-effective over the life of the policy.
That's why when it comes to buying an individual disability insurance policy for your personal income, long term coverage is typically recommended. If you need to use it someday, your long term disability insurance benefits will be your best bet to continue meeting your financial obligations in your personal life while you recover.
Some people start their own businesses to work alone. Solopreneuers, as they are called, take on the added responsibilities that come with this level of professional independence. If you can't work, your company and the customers you serve are out-of-luck. But at least your individual disability insurance policy will help replace the earnings you lose the reason you can't work is a covered injury or illness.
However, running a successful one-person operation isn’t realistic for every small business owner. Depending on how much you plan to grow, there may come a time when you're ready to build a team of employees to help you carry out your mission. This requires you to prepare for the possibility that any number of your employees could experience a serious injury or illness that leaves them disabled and unable to work, too.
Now, what probably first comes to mind is workers' compensation insurance, which is required by law in every state (except Texas). However, workers' compensation insurance is actually a type of accident insurance that only covers injuries that occur on-the-job, which are rare. Most disabling events outside of work.
Depending on the size of your business, you may be able to offer an affordable group disability insurance plan to the members of your team. Like individual disability plans, employer-sponsored group disability insurance plans can be either long term or short term in coverage. The cost of group disability insurance is typically paid for by the company, making coverage available to employees at little to no cost.
However, group disability insurance has plenty of limitations. There is usually a cap on benefits and your employees will lose coverage if they switch employers. Individual disability insurance plans, on the other hand, are portable and allow you to protect a higher percentage of your income.
Whether you can afford to offer group coverage or not, it’s essential to educate your employees about the individual disability insurance options that are available to them as well. Between individual coverage and any group coverage you are able to offer, they will have as much income protection as possible.
Loss of income isn't the only risk presented by an unexpected disability that small business owners must consider. You also need to account for the overhead expenses required to keep your business running. That's where business overhead expense insurance comes into play.
Business overhead expense insurance, or simply BOE, can help you cover your monthly business expenses if an injury or illness prevents you from working. Monthly benefit amounts typically range from $15,000 to $25,000 and can be used to cover:
- Employee salaries
- Employee benefits
- Legal and collection fees
- Maintenance services
- Professional dues
- Office supplies
- Real estate taxes
You can purchase BOE coverage as a standalone policy or bundle it with your individual disability insurance policy. In fact, if you take out a small business loan for startup financing, your lender may even require you to obtain this coverage first.
Having BOE coverage will provide you with peace of mind knowing that you will have access to the financial assistance you need to keep your business running smoothly if you experience a serious illness or injury.
Starting your own business is an exciting endeavor. Finding the right insurance to protect it is not. But it is essential to making sure your business is built to last. In order to do so, small business owners need to understand how the following types of coverage work:
- Individual disability insurance, which covers your ability to earn a living.
- Group disability insurance, which covers your employees’ ability to earn a living.
- BOE disability insurance, which covers your business overhead expenses.
Of course, there's no one-size-fits-all solution. Coverage needs vary from business owner to business owner depending on the industry, company size, and many other factors.
Ultimately, the key is to be proactive. Because the sooner you can find the right combination of disability insurance coverage, the better off you, your employees, and your business will be.
Jack Wolstenholm is the head of content at Breeze.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.