Insure Your Income With Disability Coverage
If you and your family depend on income from your small business,
you need to ensure that cash flow in the event your work flow falters.
You’ve insured your home and personal property, your vehicles and your life, but are you overlooking your
most substantial asset – your ability to earn income?
Steve Strauss, author of The Small Business Bible, uses this example: If you are 40 years old and net
$50,000 annually from your business, over the 25 years until retirement, you will earn $1.25 million – and that’
s assuming your income does not grow. That’s an asset worth protecting.
Disability insurance protects your ability to earn income. But say “disability,” and many people visualize
impairment from an accident. According to the American Council of Life Insurers, the majority of long-term
disabilities are because of illnesses, such as cancer and heart disease. Each year, 12 percent of adult
Americans suffer a long-term disability. For every seven employed Americans, one will have a period of
disability five years or longer before age 65. A 35-year-old has a 50 percent chance of a disability lasting
longer than three months before age 65.
Europeans and Australians may have the right idea in calling disability
insurance “income insurance.” Your chances of becoming disabled are much
higher than of dying – and if you become disabled, you continue to require
living expenses like food, clothing and shelter, not to mention medical care –
with no income to pay for them. According to the U.S. Department of Housing
and Urban Development, 46 percent of home foreclosures occur because the
homeowner has suffered a disability and can no longer make mortgage
Social Security provides disability benefits, but it's difficult to qualify, and the
limited benefits make it difficult to support even the most frugal standard of
living. Worker’s compensation may also be a source, but only if your disability
results from a workplace condition or accident – and remember, most
disabilities occur from illness, not injury. Don’t count on either Social Security
or worker’s compensation to provide adequate income replacement if you
Many employers today offer group short-term disability (some states even
require it) and long-term disability insurance. Group coverage is usually fairly
affordable and easy to get, but doesn’t offer much flexibility and pays only a
percentage of your salary, usually 50 percent to 60 percent. It may also have
a monthly or annual cap well below your typical annual earnings.
As a small business owner, you may have access to group coverage through
a professional association. Like employer group policies, the coverage may
be affordable and easy to get, but it may not provide the amount or extent of
coverage that you need. Individual policies may cost more, but you have more
flexibility in structuring the coverage to suit your needs and your business.
Some options will come at a premium, but might well be worth it.
Pricing for individual coverage will vary depending on:
- Amount of monthly benefit: Generally, the higher the benefit, the higher the premium.
any occupation for which you are qualified. Coverage may also specify inability to work at all or
- Definition of disability: Benefits can apply for inability to perform in your specific occupation or in
inability to work a full day.
premium. All the more reason to have that emergency cash reserve equal to four to six months’
- How long you can go before tapping benefits: The longer the waiting period, the lower the
may choose a shorter period to reduce premium costs.
- Length of benefit period: The insurance carrier may put limits on the length of coverage or you
your job, will influence premium. Expect to pay more for highly skilled professions like a doctor or
- Your occupation: The inherent hazards of your occupation, along with the level of skills required for
lawyer and for more hazardous jobs like construction.
will help your benefits keep pace with your living expenses.
- Cost of living adjustment: You’ll pay extra for this feature, but if you suffer a permanent disability, it
future without having another physical.
- Additional purchase option: Another premium feature, this lets you buy additional coverage in the
Choosing appropriate disability insurance takes careful consideration of not only your current situation but
your future circumstances – and the worst-case circumstances at that. If you depend on your current income
to live, you need to ensure it goes on flowing even if you can’t go on working.
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