Disability Insurance for Small Business Owners: A Quick Primer on Coverage Options and Claims
Owning a small business requires a substantial investment of time, energy, and money—and no matter how careful you are, things do not always go exactly to plan. An injury or illness that keeps you or a key employee out of action for even a few months could have disastrous consequences for your business, not to mention your personal income.
Purchasing the right disability insurance policies, with the coverage you need, can give you peace of mind and turn a major catastrophe into a small bump in the road. But how do you know what you need? And what do you do if the insurance company refuses to provide the benefits you paid for when you finally need them?
The disability insurance attorneys at Bryant Legal Group in Chicago work closely with small business owners to answer these kinds of questions, explain their policies, and fight for the benefits they deserve. In this post, we will take a closer look at some key disability insurance policies and concepts small business owners need to know—but if you have any further questions or needs, be sure to reach out to us directly at 312-626-9316 or complete our simple contact form.
What Life and Disability Insurance Policies Do I Need as a Small Business Owner?
There are a wide variety of insurance policies available to business owners and entrepreneurs to help them protect their income and their investments. While it is always wise to speak with an experienced disability insurance attorney before determining which would be best for your situation, three of the most common types of policies include individual long-term disability insurance, business overhead expense insurance, and key person insurance.
Individual Disability Income Insurance
Your small business is, most likely, the primary or even sole source of your personal income. Business revenues support not only the current and future health of the business itself, but also your own living expenses. First and foremost, you should consider your own personal income protection.
Purchasing individual disability insurance for yourself as a business owner can be a little trickier than being insured through an employer-sponsored group plan. While the basics are the same (figure out how much income you need to live on and purchase a long-term disability insurance policy that meets your needs), there are some extra considerations.
One potential sticking point: If you have just started your business within the last year or two, you may have a hard time proving your anticipated income and profitability to the insurance company. (Normally, this would be established through things like tax returns or signed contracts.) In the worst-case scenario, you may not be able to get disability insurance coverage at the terms you want until you have been in business for at least a couple of years.
Another potential difficulty is that small business owners often have highly variable incomes from year to year, based on how well the business performed. A typical long-term disability plan will pay you a defined percentage of your monthly salary, based on your average income. If the “average income” is based on a rough year for the business, your benefits won’t stretch as far.
For these and other reasons, it may be best (if possible) to buy your own long-term disability insurance policy while you still work full-time elsewhere, before quitting and starting on your own. Further, if you have already been in business for a few years, try to purchase a policy that determines your average annual salary based on more than just the last year of income.
- RELATED POST: Variable Income: How Much Does Long-Term Disability Pay? – Bryant Legal Group (bryantlg.com)
Business Overhead Expense Insurance
Most businesses have overhead expenses that need to be paid regardless of how much revenue is (or isn’t) flowing in. Think of things like the mortgage or rent on an office, utility and maintenance costs, or payroll.
Business overhead expense insurance (BOE) is an insurance policy that reimburses small businesses for overhead expenses up to the limits of the policy if the insured individual (usually, but not necessarily, the business owner) becomes disabled and as a result the company can no longer cover those expenses.
Most BOE policies will only pay benefits for up to 2-4 years after the insured owner or employee becomes disabled, although longer terms are sometimes available.
- RELATED POST: How is Business Overhead Expense Insurance Different Than an Individual Disability Policy? – Bryant Legal Group (bryantlg.com)
Key Person Insurance
Whether a small business thrives or fails often hinges on the singular efforts of one or more truly essential people.
In addition to the business owner or CEO, a “key person” in your small business might be the talented salesperson who brings in half your revenue, an account manager who acts as the “face” of your company and has developed close relationships with your top clients, or a software engineer with extremely niche, hard-to-replace skills.
A key person is so essential to the health of your small business that losing them for an extended period could seriously impact your company’s finances, reputation, or ability to deliver promised products or services to your customers.
While a key person might also be insured under a BOE policy, key person insurance differs from BOE in that it pays a set monthly benefit to the business (similar to regular disability or life insurance policies), rather than reimbursing actual expenses paid. One common strategy is to have a BOE policy cover overhead expenses, while a key person insurance policy provides the funds necessary to address additional costs or losses (such as bringing on contractors, hiring or training a replacement, or offsetting lost revenue).
Common Disability Insurance Challenges for Small Business Owners
Your small business disability insurance policies are supposed to take care of you when the unexpected happens. But too often, business owners run into trouble—either because their policies do not provide the coverage they really need, or because the insurance company is not holding up their end of the agreement.
Reviewing and Modifying Coverage
Businesses are continually evolving. Some business owners are in a growth and expansion phase and planning to make some major investments in the company. Others are making hard cuts after a tough year or winding the business down in the years before retirement.
Your own personal needs will also change over time. The salary you need to live comfortably probably is not the same as it was 10 or even 5 years ago. It may be more, or it may be less.
You should review and update your insurance policies regularly to ensure your current policies and coverage amounts are still appropriate for your current personal and business needs. Otherwise, you could be paying hefty premiums for coverage you do not need—or worse, forced to stretch benefits to the breaking point and still not have enough to keep the business afloat.
Dealing With Unfair Insurance Denials
If you or one of your insured employees becomes disabled, you will need to file a claim. The problem: The insurance company cares a lot more about their own business than yours, and they will be looking for ways they can deny your claim. In fact, they often fight business claims especially aggressively given how expensive these claims typically are for the insurer.
Common reasons for coverage denials include:
- Insufficient medical evidence of your disability
- Your condition is not considered disabling under your policy’s definition of disability
- Claimed business expenses are “too significant” for the evidence (for a BOE claim denial)
Remember, just because the insurance company denied your claim does not mean they are correct, or that is the final word. Claims are often denied for unreasonable or unfair reasons and are subsequently reinstated on appeal.
To use one specific, common example of an unfair claim denial: Insurance companies frequently underestimate the impact of cognitive impairments for business owners and key employees, instead focusing purely on the physical aspects of the job. A brain injury that impairs the owner’s planning, problem-solving, and critical thinking skills is obviously disabling, but the insurance company might not see it that way—at least at first.
It is hard to overstate the cost of an unfairly denied claim for a small business. That is why speaking to an experienced disability attorney as soon as possible—ideally before filing the claim, but certainly after an initial denial—is always a wise choice.
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Chicago’s Premier Disability Insurance Attorneys for Small Business Owners
If there is one thing that you should know by now, it is that disability insurance for business is not the easiest topic to understand or navigate. Disability contracts frequently use dense, confusing language that non-experts struggle to understand—and insurers often profit from the confusion. Yet making smart choices about coverage (and filing successful appeals) could truly make or break your business.
At Bryant Legal Group, our attorneys regularly assist small business owners with assessing and modifying their current private disability policies and coverage levels, filing claims on their behalf, and handling any necessary appeals. Your job is to focus on your health and your business; ours is to ensure you get the insurance benefits you deserve.