I recently received an email that May is national Disability Insurance Awareness Month. My initial reaction was, “What, people don’t know they can become disabled?”  We’ve all seen situations where an unexpected disability disrupted or even destroyed a family or business. Upon further reflection, I realized the issue is “insurance.” Many people don’t understand the kinds of disability insurance that are available.  Let’s help out the cause by providing awareness of various disability protection options that businesses might consider.

1 – Disability Income.  Many employers are aware of this form of disability coverage. If you become disabled, after a waiting period, the insurer pays a monthly income for a period of time or until the disability ceases. Companies can buy it for a group of employees (Long-Term Disability “LTD”) or for individuals (Individual Disability Income “IDI”) like themselves or key employees.  At the risk of sounding overly simplistic, if you make a high wage and are insurable, the question is not, “Can I afford it?” Rather, the question is, “Can I afford NOT to have it?”

2- Overhead Expense Protection.  Smaller, privately-held companies often avail themselves of this coverage. The idea is that if the owner, who is typically the key employee, becomes disabled, the business needs to continue paying fixed expenses such as rent and salaries. As the name implies, with this coverage the insurer pays a defined amount to the company to defray overhead expenses until the owner returns to work. I think of this as “optimism insurance” with the purpose of keeping the company’s doors open while the owner recuperates from a disability.

3 – Disability Buy-Out.  Much like Overhead Expense Protection, this coverage is more about the business than the individual. With this option an amount, typically a lump sum, is paid by the insurer if a stockholder becomes totally disabled and consequently triggers a stock buyout.  Perhaps because of high profile disabilities in the news, it seems like this coverage is getting more attention – and should.  A lot of buy-sell agreements I see either ignore disability, or have it as a triggering event, but without funding. Disability buy-out can provide the cash (typically on a reimbursement basis) when it is most needed.  Just be sure to coordinate this coverage with the terms of the buy-sell agreement.

These are the “Big 3” in disability coverage for businesses.  One replaces income, one defrays overhead and the other helps fund an ownership transfer.  With this being the month for “disability insurance awareness,” I want to point out two other coverage options that are not as well known.

• Business Loan Protection – In an environment when business borrowing is both more difficult and more important, this protection may be crucial.  This type of coverage helps ensure lending institutions get paid even when an owner becomes disabled and can’t bring in revenue to cover his/her business-related loan obligations. So, if you become totally disabled and have this insurance, you essentially transfer your loan obligation to the insurance carrier.    I’ve seen this offered as a rider to an Overhead Expense Protection policy; that makes sense to me, considering that often debt service is one of the top forms of overhead for a business.
• Key Person protection – When a key employee can no longer work because of a disability, it leaves a serious gap for the business owner and business profits can take a hit. Key person protection provides a benefit for owners to use at their discretion to fill the gap – whether that means spending the benefit to offset recruitment costs or simply replacing lost revenue.  It’s become common place for companies to protect themselves with key person life insurance.  It’s time to cover the contingency of a “living death”.

Most don’t realize – an individual is 240 times more likely to incur a disabling injury than suffer a fatal injury. It’s important for businesses and their employees to be aware of the “what if” and consider if a disability insurance policy is right for them. My intent is not to evoke pictures of hospitals, rehab centers and nursing homes. I’m suggesting, rather, images of continuing income for families, companies surviving a rough patch while the owner is gone, and successful transfers of business interests.  It’s something we don’t want to think about happening, but better to be prepared than not. Think about it. Be aware of it.