Many small business owners have purchased disability income insurance to protect their salary. That’s great news! Having a personal disability insurance policy will replace part of your clients own income if he/she were unable to work due to an illness or injury. But, if that’s the only disability income insurance these clients have, they’re leaving their business open to a considerable amount of financial risk. There are several types of disability income insurance geared specifically for small business owners that could save your clients a lot of stress and economic headaches in the future.
Income protection for small business owners is particularly important because the normal operation of the business is likely to be affected if the owner can’t work. This situation intensifies if the business cannot continue operating if the business owner is absent. This disruption of business-as-usual has a huge fiscal impact on revenue generation for the whole business.
For example, you have a dentist client who owns a private practice. If he becomes injured or sick and unable to work, it’s possible the whole office may have to shut down. While some services like dental cleanings may still be feasible, the primary revenue generator – the dentist – is missing. Without the dentist, the big-ticket procedures that bring in the most money are off the table. As you can imagine, scenarios like this for attorneys, CPA’s, chiropractors, etc. are very common. Fortunately, these white-collar clients understand the value of this income protection coverage – and they have the financial means to purchase it.
Most people think “that’ll never happen to me.” According to The Council for Disability Awareness, 25% of 20-year old American workers will become disabled at some point in their career. While those odds aren’t terrible, why would any client gamble with their most important asset – their ability to earn an income?
Clearly, the risk of a disabling illness or injury is higher than many people think, yet as a nation we’re underprepared for this eventuality. A September 2017 American Council of Life Insurers, study found that 54.3% of non-retired households (51.3 million in total) did not report having disability insurance. Assuming there is at least one adult in each household, there would be more than 51 million working Americans without disability insurance.
Most small business owners have employees who are essential to the daily operation of the business. An essential employee could be an employee who has important personal relationships, has training or knowledge essential to the functioning of the business or holds licenses or contracts necessary to conduct business. The essential employee for many small businesses is the business owner. Luckily, some insurance carriers offer Key Person Disability Insurance (also called Key Man or Key Woman Insurance) that can provide financial benefits if a key employee becomes disabled. Key Person funds can be used to help find a temporary or permanent replacement and cover some of the financial losses incurred if the key person is unable to perform his/her duties.
Although not inclusive, the following occupations are a few examples of potential key employees. Key employees are typically highly skilled or have college degrees, earn higher salaries and have more responsibilities than other employees.
Business Overhead Expense (BOE) disability insurance is another important type of coverage for small business owners. BOE covers the costs of running a business if the business owner is unable to work. BOE benefits can be used to pay fixed costs such as rent/mortgage, utilities, loan installments, insurance premiums and employee salaries. It’s important to note that BOE benefits cannot be used to cover the disabled owners’ salary. The owner should have a personal individual disability insurance policy to replace his or her income.
Who are good candidates for BOE coverage? Any client in an occupation listed above who own/operate a private practice. Think about your book of business. How many of your clients are in any of these occupations? How many of them have the right type of disability income insurance?
Many small business owners have buy-sell agreements (AKA buyout agreements) – a legally binding contract that explains how a business may be reassigned if an owner or partner dies or otherwise leaves the business. If an illness or injury prevented a small business owner from going back to work, a Buy/Sell Disability Insurance policy would help fund a buy-sell agreement. It makes it possible for the remaining owners, or the entity itself, to buy-out the disabled owner’s share.
When discussing disability insurance with small business owners, you should always try to put yourself in their shoes—to see things from their perspective. Many of these potential clients are high wage earners and high spenders. Many carry a lot of debt related to starting or running their business, their lifestyle choices, etc.
A good way to help small business owners understand the value of a disability insurance (DI) policy is to ask some probing “what if” questions. Get them thinking about scenarios unique to their situation and their business. Below is an example sales pitch you might start with.
Client profile: a young dentist who owns his practice, has a small staff and is married with two small children:
What would happen if you developed an illness or injury that prevented you from performing your highly specialized dental procedures? How long would you be able to pay your personal bills – mortgage, utilities and put groceries on the table? Would you be able to continue paying the loan for your dental practice? What would the daily operation or your business look like? Would you be able to continue paying salaries for your staff?
That handful of questions – and more importantly the answers the dentist provides – opens the door for a trifecta of disability products: an Individual Disability Insurance policy, a Business Overhead Expense policy and a Key Person insurance policy. These three products would protect the dental practice and his personal finances.