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Disability insurance for small business owners

Due to financial requirements, getting disability insurance as a small-business owner can be slightly more complicated than getting it as an employee.

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Andrew HurstSenior Editor & Licensed Auto Insurance ExpertAndrew Hurst is a senior editor and a licensed auto insurance expert at Policygenius. His work has also been featured in The New York Times, The Wall Street Journal, Forbes, USA Today, NPR, Mic, Insurance Business Magazine, ValuePenguin, and Property Casualty 360.

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Anna SwartzAnna SwartzSenior Managing Editor & Auto Insurance ExpertAnna Swartz is a senior managing editor and auto insurance expert at Policygenius, where she oversees our car insurance coverage. Previously, she was a senior staff writer at Mic.com, as well as an associate writer at The Dodo.
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Amy Northard, CPAAmy Northard, CPACertified Public AccountantAmy Northard, CPA, is a certified public accountant and a member of the Financial Review Council at Policygenius. Previously, she served as a certification administrator for the National Association of Mutual Insurance Companies (NAMIC).

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Disability insurance can help you protect your income as a small-business owner if you’re hurt or get sick and can’t work. With the right disability insurance policy, you can collect benefits up to retirement age, even if you’re never able to work again.

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How disability insurance for small-business owners works

Disability insurance replaces your income while you’re hurt or sick and can’t run your small business. You can use your disability insurance while you’re not working to keep up with your expenses, like your mortgage or rent, childcare, and groceries.

You can’t use disability insurance to cover a disability caused by a pre-existing condition, but disability insurance does cover most injuries and illnesses, including chronic pain, the loss of a limb, broken bones, complications from a pregnancy or childbirth, cancer, and more.

Your disability benefits depend on whether you get a short-term or long-term policy. Short-term disability insurance covers you for three to six months, while long-term disability insurance covers you for a year or longer, even up to retirement age.

What kind of disability insurance do small-business owners need?

The best type of disability insurance for small-business owners is own-occupation long-term disability insurance.

You can use your own-occupation disability insurance to replace your income when you can’t operate your small business because of a disability, even if you can work another job.

You may also want to consider partial disability insurance. Partial disability insurance pays benefits when your disability affects the work you usually do as a small-business owner, even if you’re not fully disabled.

Disability insurance riders for small-business owners

Here are some useful disability insurance riders, or extra coverage options, that might be worth having to protect the income you get from your small business.

  • Cost of living adjustment (COLA): Increases your monthly benefit to keep up with inflation.

  • Future increase rider: Lets you add more coverage if your income increases without having to go through another medical exam.

  • Non-cancelable/guaranteed premiums: Keeps your policy active and your rates the same long as you make payments on time.

  • Retirement protection: Replaces the retirement contributions you made while you were working.

  • Student loan rider: Makes payments towards your student loans while you can’t work.

Disability insurance vs. business overhead expense insurance

Disability insurance for small-business owners is different from business overhead expense insurance (BOE). While disability insurance covers your personal expenses, business overhead expense insurance covers your business’s expenses for one to two years, including:

  • Rent and utilities

  • Maintenance fees

  • Accounting fees

  • Salaries

  • Payroll and property taxes

  • Employee benefits and workers compensation

  • Postage

  • Legal fees

You can save money by getting your BOE and long-term disability insurance policies from the same insurance company.

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Do you need to get disability insurance for your employees?

You may need to get group disability insurance for the employees of your small business. California, Hawaii, New Jersey, New York, and Rhode Island require most small businesses to provide short-term disability insurance to their employees.

States allow you to use some money from employees’ wages to offset the cost of providing disability insurance, so you don’t have to cover all costs yourself.

Is disability insurance a small business expense?

Unlike personal disability insurance benefits, the cost of providing your small business’s employees with group disability insurance might be tax deductible as a business expense. 

That said, it’s best to speak with a tax professional when you’re setting up your business to be sure.

When should small-business owners get disability insurance?

It’s easier to get disability insurance before you start a small business, since it can take a while to draw an income from a business and you have to verify your income before you can get a policy.

You can still get disability insurance after starting a small business, but it might take longer. In this case, disability insurance companies may ask for signed contracts instead of tax returns to prove future income.

Your insurance company may also offer you disability insurance if your small business is in a potentially high-paying field, like medicine, law, or financial services.

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Cost of disability insurance for small-business owners

The cost of disability insurance for small business owners is usually 1% to 3% of your income. Your premiums also depend on your benefit amount, any extra riders you add to your policy, and your disability insurance policy’s waiting period (the time between your disability and when your benefits start).

Our disability calculator can help you find affordable coverage so that the cost of your disability insurance doesn’t take away too much from your small business’s revenue.

How to get small business disability insurance

You can get disability insurance for small-business owners by following these steps:

  1. Decide when to get disability insurance You may want to get disability insurance before you start a small business, when it’s easier to verify your income.

  2. Calculate how much coverage you need Select your coverage, how long your benefits can last, and your waiting period. 

  3. Consider riders Some riders can be helpful for small business owners, but you don’t have to add any extras if you’re happy with your policy’s coverage.

  4. Compare disability insurance quotes Get disability insurance quotes from multiple companies to find the most affordable coverage for your needs.

  5. Fill out a formal application Fill out a longer application with more information about your work and health history after you compare quotes.

  6. Complete a phone interview Answer questions about your medical history and disclose any risky hobbies or habits, like smoking.

  7. Go through underwriting Complete a medical exam and get a statement from your doctor about your health, and verify your income or the income you expect from your small business.

  8. Sign your policy and get covered When you get your policy in the mail (the underwriting process can take four to six weeks), sign it and send it back to start your coverage.

Frequently asked questions

Can a business owner collect disability benefits?

Yes, you can still collect benefits from a disability insurance policy if you own a small business and you’re too hurt or ill to work.

Is disability insurance different from workers’ comp?

Yes, disability insurance is different from workers’ compensation. Workers’ compensation covers injuries that occur at work, while disability insurance covers injuries that you get outside of work. The employer pays for workers’ comp, but individuals usually pay for their own disability insurance.

Do business owners need short-term disability insurance?

Short-term disability insurance doesn’t protect you as well as a long-term policy, but small-business owners can still use short-term disability insurance to close the gap between your disability and the start of your long-term disability benefits.

Author

Andrew Hurst is a senior editor and a licensed auto insurance expert at Policygenius. His work has also been featured in The New York Times, The Wall Street Journal, Forbes, USA Today, NPR, Mic, Insurance Business Magazine, ValuePenguin, and Property Casualty 360.

Editor

Anna Swartz is a senior managing editor and auto insurance expert at Policygenius, where she oversees our car insurance coverage. Previously, she was a senior staff writer at Mic.com, as well as an associate writer at The Dodo.

Expert reviewer

Amy Northard, CPA, is a certified public accountant and a member of the Financial Review Council at Policygenius. Previously, she served as a certification administrator for the National Association of Mutual Insurance Companies (NAMIC).

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