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Disability Income Insurance: Small Business Owner


There are different types of individual disability income coverage available for businesses. Depending on the size of the group, medical underwriting may or may not be rquired. With medical underwriting, an insurer takes the applicant's past and current health condition into account to determine whether to issue a policy, and, if so, for how much premium.

If you are considering obtaining this kind of coverage, below is an overview of alternatives. It is recommended that you work with a knowledgeable insurance agent or broker who can advise and guide you in this process. To maximize his or her help, be open about your health condition. (To learn how to choose and maximize use of an insurance broker, click here.)

Different Types of Individual Disability Income Insurance Coverage

While the purpose of each of these policies is separate and unique, they all contain essentially the same type of features discussed in Disability Insurance: Individual.

  • Disability Income Insurance: The most commonly used income protection for the business owner is a Disability Income Policy. For information about what is, and is not, covered by these policies, see Disability Insurance: Long Term: Individual.
  • Business Overhead Expense Disability Insurance: This insurance pays benefits to the business to cover overhead expenses when income is not coming in due to disability for a pre-determined period of time.
    • Premiums can be deducted as a business expense.
    • Proceeds or benefits paid are taxable as business income.
  • Key-Person Disability Insurance:  Protects a business against loss of income resulting from the disability of a key employee. Like the Business Overhead coverage, benefits are paid to the business. Since the premiums are deductible as a business expense, the benefits are subject to income tax to the business.
  • Business Recovery Insurance: Provides benefits to the owner once he or she returns to work full-time, and while reestablishing a customer base.
  • Disability Buy-Out Policy: For jointly-owned businesses, this type of coverage provides funds to buy-out a disabled partner's share of the business.

Premiums for these business insurance policies are generally tax deductible as a business expense. If you deduct the premiums, the income is taxable.

NOTE: While considering disability income protection, consider all the other actions that a business owner should also consider. For example, planning for how your workload will be handled if you are not feeling well  or how the business will coninue. 

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