Disability insurance provides policyholders with coverage that replaces a portion of an employer's or employee's income if he or she becomes too sick or disabled to return to the job. While many small business owners carry a variety of other insurance plans (health, fire, theft, and life), a smaller percentage maintain plans that cover themselves or their employees in the event of long-term disabilities. Many business experts state, however, that small businesses that do not carry such coverage are courting disaster. They note, for instance, that according to the National Association of Insurance Commissioners, a 35-year-old person has a 50 percent chance of being struck down by a disability of three months or longer before he or she turns 65, and that in a partnership of two 35-year-olds, the odds of a long (three months or more) disability striking one of them before they turn 65 jumps to 75 percent. Moreover, Bob D'Angelo noted in San Diego Business Journal that people in their early 30s are three times more likely to suffer a disability lasting three months or longer than to die, and people in their early 50s are twice as likely to be on the disabled list than to die, yet disability insurance coverage continues to lag behind other forms of business insurance. "While most employers recognize the need for health and life insurance," wrote D'Angelo, "relatively few are aware that the greatest threat to their own and their employees' livelihood is long-term disability. Indeed, the viability of a business could be at stake if a disabling illness or injury strikes a key executive."
Small business owners seeking to purchase long-term disability insurance (DI) coverage for themselves and their workers have two basic policies to choose from, each tailored to a specific target.
GROUP LONG-TERM-DISABILITY PACKAGES Group coverage generally replaces 40 to 60 percent of the insured person's income, usually up to about $5,000 a month. This compensation is fully taxable if the premium is paid by the employer, but the company is permitted to deduct the premium as a business expense. Comparatively inexpensive when compared with other business insurances, it nonetheless is not widely used by small businesses (the U.S. Bureau of Labor Statistics indicated that only 23 percent of companies with fewer than 100 employees offered such coverage in the mid-1990s). Small business consultants contend, however, that firms that do offer this coverage have often found that it increases their attractiveness to potential employees, provided that the company pays for the policy.
INDIVIDUAL LONG-TERM-DISABILITY PACKAGES
Individual disability policies are more expensive than group packages, but provide greater coverage. Typically, they also provide a higher percentage of replacement income and greater portability. In addition, Abby Livington noted in Nation's Business that the higher cost of individual policies "drops considerably when individual policies are sponsored by an employer and at least three people purchase a plan. Individual coverage under an employer-sponsored LTD [Long-Term-Disability] plan costs about $1500 annually…. Employer-sponsored individual LTD policies provide what is in effect a higher percentage of income replacement primarily because the income is not taxable. That's because the individual—and not the company—pays the premium with after-tax dollars, which exempts benefits from taxation."
Many disability insurance policies carry provisions that are particularly appealing to small business owners. National Underwriter Life and Health noted several specific aspects that can be of significant benefit:
Factors to consider in weighing the advantages and disadvantages of a long-term-disability policy include:
Both insurance agents and business consultants can be most helpful in sorting through the many variables of disability insurance plans that must be studied before settling on a final plan.
D'Angelo pointed out that disability insurance also can be wielded for purposes other than simple disability compensation. Indeed, business partners can shape disability insurance plans to finance "buy-sell" agreements: "This arrangement guarantees that the disabled partner's interest in the business will be sold to the remaining partner(s) at a price that has been agreed on in advance. The insurance policy provides the cash at the time of the buy out, eliminating the need for the business to deplete its assets or to incur long-term debt to make the purchase. The disabled partner gets a fair price for his equity in the business—and receives monies at a time when he has lost his earning power and is likely grappling with increased health care costs."
Bury, Don. The Buyer's Guide to Business Insurance. Oasis Press, 1994.
D'Angelo, Bob. "Disability can be Greatest Threat to Livelihood." San Diego Business Journal. January 24, 1994.
Demarais, Steve. "Many Business Owners Showing Wish to Own DI." National Underwriter Life and Health. February 17,1997.
"How to Choose the Right Disability Coverage." The Business Owner. January-February 1997.
Livington, Abby. "Insuring Your Earning Power." Nation's Business. April 1997.
Lynn, Jacquelyn. "What's the Damage?" Entrepreneur. July 2000.
Murphy, Stephen V., and Richard H. Wille. "Disability Provisions Show Big Changes." National Underwriter Life and Health. March 13, 2000.
Tinkham, Leo D. "Evidence of Cost Savings Grows for Integrated Disability Management." Employee Benefit News. August 1, 2000.