Disability Insurance
Disability income insurance is a type of insurance policy that replaces a portion of your earned income if you become unable to work due to a qualifying illness or injury. It's often referred to as "income protection."
The core purpose of this insurance is to provide a financial safety net to help you cover everyday living expenses like your mortgage, utilities, and groceries when you can no longer earn a paycheck.
Disability Insurance Basics
Benefit Amount: The policy pays a monthly benefit, which is typically a percentage of your pre-disability income (often 50% to 70%).
Definition of Disability: Policies have specific definitions of what constitutes a disability. "Own occupation" coverage pays if you can't perform the duties of your specific job, while "any occupation" is a stricter definition that requires you to be unable to work in any job for which you are qualified.
Waiting Period: There is an "elimination period" or waiting period, which is a set amount of time after you become disabled before benefits begin to be paid.
Benefit Period: This is the length of time you can receive benefits, which can range from a few years to retirement age, depending on the policy.
Disability Buy Out
A Planned Exit Strategy: This type of policy is typically used to fund a pre-existing "buy-sell agreement" between the business owners. This agreement legally obligates the disabled owner to sell their interest in the business to the remaining owners (or to the business itself) after a set period of time, such as 12 to 24 months.
Funding the Purchase: The insurance policy provides a lump sum or a series of payments that the remaining owners can use to purchase the disabled owner's interest. This prevents them from having to use business cash flow, take on debt, or sell off assets to complete the buy-out.
Benefits for All Parties:
The disabled owner receives a fair, predetermined value for their share of the business they can no longer contribute to.
The remaining owners gain full control of the business, ensuring its continuity and stability.
The business itself avoids the financial strain and potential disputes that could arise from having a non-contributing owner.
It's a crucial part of a comprehensive business continuation plan, separate from a personal disability income policy, which is designed to replace an individual's lost salary.
Disability Overhead Protection (BOE)
Disability overhead protection insurance, also known as Business Overhead Expense (BOE) insurance, is a policy that reimburses a business for its fixed monthly expenses if a key owner or partner becomes disabled and is unable to work.
Unlike a personal disability policy, which replaces your individual income, this type of insurance is designed to keep the business running smoothly by covering its essential costs.
Key features of a BOE policy include:
Covered Expenses: It pays for a wide range of a business's regular, fixed costs, such as rent or mortgage payments, employee salaries, utilities, professional fees (like accounting and legal services), and business insurance premiums.
Purpose: The goal is to ensure the company's doors stay open and its financial obligations are met while the disabled owner is recovering. This prevents the business from having to use its cash reserves or close down.
Benefit Period: The benefit period is typically short, usually lasting for 12 to 24 months, as it's intended to cover a temporary absence.
Eligibility: This type of insurance is most valuable for small businesses and professional practices where the owner's inability to work would have a direct and significant impact on the company's revenue.
Individual Disability Protection (BOE)
Individual disability insurance, also known as personal disability insurance, is a policy that you purchase on your own to replace a portion of your income if you become disabled and are unable to work.
It is distinct from group disability insurance (offered by an employer) and government programs (like Social Security Disability) because it is a private contract tailored to your specific needs.
Here are its key features:
Income Replacement: It typically replaces 50% to 70% of your pre-disability income. This benefit is usually tax-free if you pay the premiums with after-tax dollars.
Portability: Since you own the policy, it stays with you even if you change jobs or careers.
Customizable: You can choose the key features of the policy, including:
The benefit amount (how much you get paid).
The benefit period (how long you get paid—e.g., 2 years, 5 years, or to age 65).
The elimination period (the waiting period before benefits begin).
The definition of disability (such as "own-occupation," which is a more generous definition of disability than "any-occupation").
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