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Disability insurance for your small biz

Disability insurance for your small biz

If you're like many entrepreneurs, your business is your livelihood. If you should become disabled and unable to work, not only would you lose your source of income, but your small business could fail. Disability insurance can help you avoid financial disaster.  

"Anyone who's relying on their income for expenses should have disability insurance," says David Mills, senior vice president for small business at MetLife. In fact, the U.S. Social Security Administration estimates that just over 1 in 4 of today's 20-year-olds will become disabled before they retire. Among the common causes of disability are cancer, mental disorders and musculoskeletal disorders such as neck and back pain, according to the Council for Disability Awareness.

Disability insurance will replace a portion of your income if you become sick or injured and are unable to work for a period longer than 90 days. Here's what you need to know to choose the right policy.

1. Assess your income.

While it could be tempting to choose an amount of disability coverage based on the cost of the premium, it's a better idea to figure out how much money you need to live on each month. Chances are you don't need to replace your full salary. For example, you may qualify for Social Security Disability Insurance (SSDI). The average monthly benefit paid by SSDI in 2012 was $1,130 per month. You also may have savings you can tap. Your disability insurance policy would supplement those other financial resources.

A typical disability insurance policy covers about 60 percent of one's salary, Mills says, though you can buy more or less. For entrepreneurs who don't take a regular salary, an insurer might use recent tax returns or annual business earnings for the last few years to determine average income. As your income increases and your lifestyle changes, review your policy to make sure it's still sufficient. After all, if you become disabled, you don't want to receive a payment based on what you were making 10 years ago.

2. Apply while healthy.

Your medical history can impact the amount you pay for disability insurance or even whether you are approved for a policy. For example, a person who has a chronic disease may be more likely to file a claim in the near future, so he or she may be charged higher premiums to cover the extra risk. In some cases, an insurer may refuse to sell you a policy if you have a pre-existing condition, or they may state they won't cover a disability that results from that pre-existing condition, Mills says.

3. Understand your options.

There are different types of disability insurance policies.

  • Noncancellable policies are those you can keep as long as you pay the premium, and the rate never changes.
  • Guaranteed renewable policies are those that can always be renewed, but the rate may change.
  • Conditionally renewable policies are those that can be canceled for reasons stated in the policy.

Typically, policies that give you a guaranteed rate that never changes will be more expensive, Mills says.

4. Consider a group plan.

Every time your business adds employees, you should re-evaluate your business insurance needs, says Trevor Chapman, a spokesman for Farmers Insurance.

When it comes to disability insurance, there are advantages to buying a group plan that not only covers you but covers your employees as well. A group disability plan is a benefit that can help with recruiting, and such plans make it easier for you -- and your employees -- to get insured. Group plans typically cost less than individual plans because the insurance company takes on less risk when insuring multiple people. After all, for every employee that needs to file a disability claim there is likely another worker who won't. Another benefit of group plans is that they are not medically underwritten, meaning no one's individual health factors into the rate.

If you don't have enough employees to qualify for a group plan, you might be able to get a group rate for disability insurance through an affinity group or professional organization that you belong to.

5. Add coverage with multiple plans.

Another factor that can impact what you pay for disability insurance is age. Older people are considered riskier since they're more likely to get sick than someone who is young and healthy. If you have a good rate on a policy and you find that you need more disability insurance later, you might want to buy an additional policy and "stack" one on top of the other, giving you more coverage between the two policies. Some people who have a group disability policy may decide to stack an individual policy on top of it to get more coverage, Mills says.

6. Consider the future.

You can also add what's known as a future insurability option. This rider gives you the option to buy more disability insurance at a future date without having to undergo a medical exam. So if you need more coverage 10 years from now but your health has taken a turn for the worse, you don't have to worry about medical conditions impacting your ability to buy an individual disability insurance policy.

Once you've reached retirement age, cancel your disability insurance. After all, it's only designed to replace income during your working years.

"Business owners typically think they're invincible," Mills says. However, all it takes is one major illness or accident for them to realize that they are not.

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