Disability insurance for small-business owners

Getting disability insurance as a small-business owner is slightly more complicated than getting it as an employee due to financial requirements.

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Amanda Shih

Amanda Shih

Editor & Licensed Life Insurance Expert

Amanda Shih is a licensed life, disability, and health insurance expert and a former editor at Policygenius, where she covered life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.

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Amy Northard, CPA

Amy Northard, CPA

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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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Your primary focus when building your small business should be making sure your finances are in order. That means not only making a profit, but also minimizing risk and shielding your business from unexpected expenditures.

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Long-term disability insurance is designed to replace your income if you become disabled and can’t work. Getting disability insurance as a small-business owner is slightly more complicated than getting it as an employee because you need to prove that you're profitable for at least two years. However, there are some ways to get covered if you haven't reached profitability yet.

Getting disability insurance as a small-business owner

The process for purchasing a long-term disability insurance policy is roughly the same whether you're a small-business owner or not. You calculate how much money you earn, how much you’ll need to survive if you become disabled, and how much you can afford to spend on premiums. (Short-term disability insurance is usually only offered as part of an employee benefits package, and may not be worthwhile to purchase on your own.)

Then, get disability quotes and apply. You’ll have to fill out some paperwork, do a phone interview with the insurer, and take a paramedical exam to confirm your health status. (A licensed agent at Policygenius can get you disability quotes and help you choose a plan that provides you with the coverage you need, while not putting you in the red.)

Getting long-term disability insurance as a small-business owner or independent contractor is more complicated than getting it as a regular wage-earner because you need to show that your business has been profitable for at least two years. For most people, that means showing two years’ worth of tax returns.

The type of tax document you have to show depends on the type of business you run, but your disability insurance provider should tell you exactly what you need to provide.

→ Learn more about how to get disability insurance

What if I’ve been a small-business owner for less than two years?

If you’re thinking about quitting your job and starting a small business, consider purchasing a disability insurance policy before you quit, while you’re still earning an income. That way, you won’t have to wait for two years of profit before you’re eligible for long-term disability coverage. Make sure the policy is non-cancelable, which means that the carrier can’t raise your premiums as long as you keep paying them, and guaranteed-renewable, which prohibits the insurer from altering your coverage.

If you’ve already struck out on your own, but can’t wait the two years for coverage, you’re not out of luck. Here are some scenarios under which you can still get disability coverage if you haven’t been in business for two years:

  • Your business is in the same industry as your previous employment.

  • You have signed contracts that prove future income, on which you can base your coverage amount instead of tax returns.

  • You’re starting a business with a high income potential. Under the insurer’s starting practice limits coverage, a minimum amount of coverage may be offered to certain professionals. These are usually doctors, dentists, pharmacists, veterinarians, CPAs, engineers, architects, and attorneys.

Students studying to go into a high-earning profession may also be eligible, including medical students, MBA students, and medical and dental interns and residents. Check with your insurer for coverage limits and eligibility.

→ Learn more about finding your best disability insurance policy

How much does disability insurance cost for small-business owners?

Long-term disability insurance usually costs between 1% and 3% of your income. Your premiums are partly determined by the size of your benefits and the amount the benefits are supposed to last, which is called the benefits period.

As a small-business owner, your premiums shouldn’t be so high that they’re unaffordable in your profit margins.

Use our disability calculator to see your coverage costs.

Can disability insurance pay my employees while I’m disabled?

If your small business employs people, you’ll want to keep paying them if you become disabled and can’t keep running the business. For that, you’ll need a separate disability insurance product called business overhead expense (BOE) disability insurance, which protects your business’ expenses. Some of the expenses covered by business expense insurance may include:

  • Rent

  • Utilities and maintenance services

  • Equipment, including office supplies and depreciation of business assets

  • Salaries, payroll taxes, employee benefits, workers’ compensation

  • Property taxes, accounting fees, loan obligations, subscription dues

  • Postage

  • Legal fees

Business overhead expense insurance is typically short-term coverage, covering one to two years of expenses. It doesn’t replace your personal long-term disability policy, which covers your expenses. You may be able to save money by buying your BOE and long-term policies from the same company, so check with your insurer about rates.

→ Learn about other types of disability insurance

Frequently asked questions

What is long-term disability insurance?

If you have have disability insurance, the insurance company will pay you benefits when you become disabled and can't work. Benefits can last years or even until you turn retire.

Can you own a business and get disability?

Business owners can get disability benefits from an individual long-term policy if they meet the insurance company’s definition of disability. Depending on your income, owning a business can may affect your ability to collect disability from Social Security.

Are my long-term disability insurance premiums tax-deductible?

No. Long-term disability insurance premiums are not tax-deductible for small-business owners, but you can deduct premiums for business overhead insurance or insurance premiums you pay on behalf of your employees.