Maryland Bar Bulletin
Publications : Bar Bulletin : April 2006

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Disability Income Coverage for the Small Business Owner

Which of your assets do you value most? Is it your home…your automobile…your investments? Maybe it's your business. More than likely, your most valuable asset is actually your ability to earn an income. While most individuals own insurance to protect their homes and automobiles from unanticipated misfortune, only 15 percent of workers currently have insurance to protect their income, according to "Life Industry Primer", published by JP Morgan in January 2004. According to the National Safety Council in 2003, income lost through disability is two times as great as auto accident losses and three times as great as fire losses. Disability Income (DI) insurance can replace a portion of your lost income should a disabling injury or illness prevent you from working.

Disability Income Insurance for Your Business
DI insurance, while fundamental for individuals, is just as necessary for small business owners. If just thinking about the occurrence of a disability in your business or professional practice makes you feel uncomfortable, imagine what it might feel like if one actually occurred. It would be no small matter to the life and continued viability of the business. In the event of the disability of a small business owner or of a partner in such a business or practice, there are a number of things with which DI insurance can help:

  • Paying the operating expenses of the business
  • Funding partnership buyouts
  • Replacing lost earnings of a business owner or an employee on a tax-advantaged basis to the business
  • Providing return-to-work benefits to a business owner or his or her employees
  • Protecting and maintaining retirement contributions of a business owner or of an employee

Let's focus on three of these areas.

Business Operating Expenses
A Business Overhead Expense (BOE) disability policy can help pay the costs of maintaining your business should you become disabled. If a disability occurs, the costs of running the business will not go away. Payroll, rent, leases and utilities will still need to be paid whether you are working or not. BOE insurance can be put into place to cover these and other expenses while you are out of work for an injury or sickness. This may allow for the business to continue to operate and grow while you are out and still be profitable when you are able to return to work.

Buy-Sell Agreements
With a buy-sell DI insurance plan in place, business succession preparation can truly be in force should an unexpected accident or illness occur. Many firms have buy-sell agreements in place, typically funded with life insurance, in case of the unexpected death of a partner. However, for the more likely scenario, a disabling injury or illness, there is often no DI insurance in place to fund a buyout. A 2001 statistic from the Health Insurance Association of America bears this out: "During the course of your career you are three-and-a-half times more likely to be injured and need disability income insurance than you are to die and need life insurance." It is certainly preferable to fund a buy-sell with DI policy contract benefits than to take money from company profits to fund an agreement.

Maintenance of Retirement Plan Contributions
Contributions to a qualified retirement plan can only be made if an individual is working, and a total disability will stop all contributions – both those made by the individual and those made by the employer. With a retirement protection DI policy, or a rider on an individual DI policy, you can continue your retirement contributions even if you are unable to continue working. A retirement protection DI policy pays benefits to an irrevocable trust while you are out on claim. The trusts generally offer a wide range of funding options to aid the insured in selecting options that best fit their needs and investment objectives. A retirement DI policy can help the insured make 100 percent of their retirement contributions, including the employer portion.

To have an effective personal financial strategy in place you must have addressed the possibility of an unexpected injury, illness or death, and so, too, for an effective business financial plan. While you cannot predict the future you can address the probability of the occurrence of unfortunate events and prepare for them now when your efforts can be the most effective.

Kelby Gelston is an associate of FranklinMorris, Coordinating Broker for the Bar Associations Insurance Agency, Inc. For more information on the insurance benefits available to MSBA members, visit

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Publications : Bar Bulletin: April 2006

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