11/ 21/ 2005
by Jeffrey Moses
When the owner or key employees of a small business lose significant work time due to injury or illness, the finances of the company can suffer. The owner may lose his or her source of income during the recuperation period, and the company may be forced to close, if revenue cannot be generated for several months, a year or longer.
To guard against this, you can purchase various types of insurance. The typical business insurance package normally doesn’t include these, but you can add them separately.
1. Disability insurance. This helps replace a percentage of income when an illness or accident makes it impossible to work. The percentage varies, ranging from about 40 to 60 percent of gross income. This could help with monthly bills and mean the difference between a business staying afloat or shutting down. The cost of disability insurance depends on the amount of coverage, the length of time until payments begin after an illness or accident (usually three to six months), the health of the individual covered, the inherent risks of the business, etc.
2. Disability buyout. Co-owners of a business can take out insurance that helps finance a buyout by one of the partners if the other becomes disabled and unable to work. This insurance assures that the disabled partner will receive funding during recuperation and makes it easier for the remaining partner to accomplish the buyout. When purchasing this type of insurance, you must establish a predetermined price for the buyout. As your company grows, you should amend this amount regularly.
3. Key Man insurance. Many small businesses depend on specific individuals for its continued success. Some companies, in fact, could not survive if one or more “key” individuals suddenly died or were injured and could not work.
To guard against financial loss due to the absence of an indispensable employee, many companies take out “Key Man” insurance, in the form of life insurance or disability insurance––or both. This insurance is not payable to the individual, but to the company. For this reason, the company normally pays for the insurance. The individual could take out separate life or disability insurance, but it would be separate from the key man insurance purchased by the company.
4. Business overhead expense insurance. This pays all overhead of the business while the covered individual is disabled (utilities, rent, mortgage, lease, etc.). Coverage usually begins 30 days after the disability begins and can last up to two years.
5. Recovery disability benefits insurance. After a person returns to work full-time, this insurance pays a percentage of the income lost during the disability period. You can purchase this in addition to the other types of disability insurance mentioned above, and it can help you build your business back up after an extended absence.
Check with your insurance agent to determine which, if any, of these types of disability insurance could meet your needs. Prices and terms vary among insurance companies, so spend some time looking for the best deal before purchasing.
