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Disability insurance, hands down, is the most important insurance no one has. That is right. Name any other insurance that will pay a percentage of your salary, as long as you wish and specify, in case you can’t work due to injury, sickness, or disability. However, disability insurance can be hard to qualify for. That doesn’t mean you shouldn’t get it. If you are a business owner, you have other options in which disability insurance may be easier to qualify. In this article, we discuss the importance of disability insurance and the best guaranteed-issue disability insurance for small business owners.
Why Do You Need Disability Insurance?
If you are a small business owner, you wear many “hats” (we know). Many people rely on you: your staff, your suppliers, your customers, and most importantly, your family. What if you could no longer earn a paycheck? Think about that for a minute. Let’s say you paid yourself last Friday. Driving home from work, you think everything is OK in your life right now. Suddenly, a cell-phone texting driver slams his car into yours. You are severely injured and life-flighted to the nearest major hospital. You will live, thankfully, but your road to recovery is a long one.
Your injuries are just the start of the pain. Since you are a small business owner, you do it all. Who is going to work with your customers? Who is going to make sure the business runs smoothly? How will your family dynamics change? And, more importantly, where will you get money? It is an all too real and common situation.
This is where disability insurance comes into play. A proper disability insurance policy pays a percentage of your income in case of disability. The policy keeps your future and dreams alive. Think about it. I mean it. If you can’t earn a paycheck because you are sick or injured, and you can’t work, what will you do? I don’t need to throw in stats on how people go bankrupt because of lack of coverage or things like that. Just the thought of not having a paycheck for an extended period of time should make you worried.
Disability Insurance For Small Business Owners
We have written about disability insurance ad nauseam. According to the Council of Disability Awareness, 51 million working Americans are without it. Likely, you are, too. We aren’t going to rehash the needs discussion here. If you want to know more about the importance of the definition of disability, for example, feel free to click on the link. Or, contact us and write us a question. We are more than happy to help.
Most people qualify for disability insurance. Some people, however, just can’t. They either have a significant pre-existing condition, lifestyle, or health condition. However, there are options if you can’t obtain a traditional disability insurance policy.
Since you are a small business owner, you have another option: group disability insurance coverage purchased at guaranteed issue. What does guaranteed issue mean? It means that you will be given disability insurance no matter what. Coverage is automatic. Have a serious condition? You have disability insurance. Overweight? You have disability insurance. Cancer in your health history? You have disability insurance. Lifestyle concerns? You have disability insurance.
How is this possible, John, you ask? Well, it’s all about the underwriting. Individual underwriting is based on you. It is based on your health among other variables such as your occupation and age.
Group disability insurance underwriting is different. Group underwriting is based on the carrier’s claim experience for occupation class. So, the underwriter looks at the group of employees as a whole, rather than a single individual. Usually, the insured fills out a short application with limited health questions asked. And, underwriting requires no medical exam! Depending on the number of participants, coverage could be at guaranteed issue. Why is this important? The number of participants spreads the carrier’s risk. The more participants, the lower the risk. (In theory, of course.)
Disadvantages of Group Underwriting for Disability Insurance
Compare this to individual underwriting, which specifically looks at you and your health, job class, income, etc. The insurance company spreads its risk among members of the group whereas it spreads your risk on you. That is why if you have a health condition or a serious medical condition, your premiums are higher. The insurance company mitigates the higher chance of claim through an increased premium.
While it sounds great, there are limitations, though. Most of these limitations pertain to the group policy itself. First, group disability insurance policies are usually “plain vanilla”, meaning you can’t customize the policy to meet your specific needs. What you see is what you get.
Second, the definition of disability sometimes is more stringent. Most individual policies offer the beneficial “true” own occupation definition. Many group plans do not offer this. Most do, however, offer a modified version.
Third, many group policies coordinate with social security or other social insurances. Many also do not cover certain industries or do not cover husband/wife/spouse owned businesses or family-owned businesses.
That doesn’t mean you should not have group coverage. You should if it makes sense and if the plan is right.
What do you mean if the plan is right?
That is a good question. There are many group disability insurance plans available. Some, in our opinion, are better than others. Depending on the plan, some plans might have a stringent disability definition. Or, they may require some health underwriting. Or, they may exclude your profession.
In the next section, we discuss, in our opinion, the best guaranteed-issue disability insurance for small business owners.
The Best Guaranteed-Issue Disability Insurance For Small Business Owners
There are many carriers offering disability insurance for small business owners at the group level. In our opinion, some are better than others and only one stands out.
We work with a carrier that offers guaranteed-issue disability insurance starting at 2 eligible employees. That is right. They will insure up to 19 employees. They also cover family-related businesses and husband/wife/spouse businesses. So, if you and your spouse own a company together, such as a partnership, you both can obtain disability insurance.
Even better, if you are disabled due to a pre-existing condition, you have coverage.
What, John? No way! You are crazy! What is the catch?
No, we are not crazy. There is a pre-existing condition clause, but unlike those found in individual policies. If you are disabled from a pre-existing condition within the first 12 months of the policy’s effective date, you will receive a partial benefit. The partial/pre-existing benefit is 30% of your basic monthly earnings to a maximum of $3,750 per month for 12 months. If there is a “catch”, I guess that is it. If you go on disability from a pre-existing condition after the 12 months (for example, the effective date of your policy is January 1, 2017, and you go on disability June 1, 2018 – 15 months), you have full coverage.
The policy contains own occupation definition for 36 months. After that, “any” occupation definition exists. In this case, any occupation means if you cannot perform the material duties of any occupation that you are reasonably qualified for based on education, experience, or training.
Additional Benefits And Provisions
If you read our previous articles on disability insurance, you know how important partial disability benefits are. This policy contains partial disability benefits without the total disability requirement that many policies have. Essentially, the benefit is 50% of your total monthly disability benefit. All you need to do is satisfy the elimination or waiting period.
That brings us to the waiting period. You have a choice of 60, 90, or 180 days. As we discussed before, your first disability benefit payment won’t occur until 30 days after the satisfaction of the elimination period.
You can insure up to 60% of your basic salary (excludes OT and bonuses, just like an individual policy) up to $7,500 monthly maximum.
The benefit period is to normal retirement age as defined by the Social Security Administration.
There is a rate guarantee of 36 months. In other words, your premiums won’t go up for 3 years. If there is a disadvantage to this plan, it is that rates do go up every 5 years as participants enter new age bands. However, in looking at rates for many occupations, they are competitive.
The employee can pay up to 100% of the premium. If you do pay 100%, ALL employees must participate.
You can even carve out a class of employees if you wish. So, if you have office staff who wants coverage, you can do that.
Eligibility For Disability Insurance For Small Business Owners
There are eligibility rules you need to follow.
Firms in business for less than 1 year, not participating in social security, and with employees living on the employer’s premise are ineligible.
Home-based businesses are also ineligible. An easy workaround on this is to establish an official shared office or virtual office space.
Employees need to work full time more than 30 per week. You can include part-time employees working 30 hours or less (min of 20) as long as the number of part-time employees is less than 25% of your workforce.
Many industries qualify for this insurance including:
Cleaning, Janitorial, and Maintenance Companies
Massage Therapy Studios
Some Construction Companies (more below)
Real Estate Agents/Brokers
Food Service Managers
Restaurants and Bars (yes)
And the list goes on.
The plan covers 90% of industries. However, some industries just don’t qualify because of large risk. Include heavy construction, liquor stores, farmers, fishermen, gas stations, some specialized physician practices, and some more. If you think your occupation does not qualify, contact us. We will help you out.
As we mentioned, there are participation requirements. They are as follows:
2 eligible employees (say you and your spouse) – both must be insured
3 to 5 eligible employees – all but one must be insured
6 to 9 eligible employees – all but 2 must be insured
10 to 19 eligible employees – 75% must be insured
Process For Disability Insurance For Small Business Owners
Set up is very easy. Here are the steps:
(1) Confirm your firm’s eligibility and industry classification
(2) Confirm eligible employees
(3) Determine how many need to insured per the chart above
(4) Decide if you, as the employer want to pay all, some, or none of the employee’s premiums
(5) Fill out a very short application which contains no health questions. That is right. As we said, there are no health questions. Guaranteed-issue coverage with a favorable pre-existing benefit clause.
That is it.
Other Insurance You Can Add
The carrier also allows Life/AD&D, short-term disability, and dental/vision plan on the same application. It is really simple. Again, guaranteed-issue coverage, but participation requirements apply, just like with the long-term disability coverage. Their short-term disability allows maternity coverage. Contact us to learn more and tell us what information you need.
Not many Americans have disability insurance. As a small business owner, you can easily obtain this important coverage and at guaranteed issue. We work with a carrier that has a great plan for small business owners. Applying is very simple. Are you interested in learning more? Do you need assistance? Feel free to contact us or fill out the form below. As with everything we do, we work with your best interest first and foremost. If we feel this is not the right plan for you, we will tell you and help you find one that is. That is the only way we know how to work with our clients.