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Business owners buy insurance to protect many things: health, life, liability, vehicle, and inventory are just a few. But what happens if you become sick or are unable to work for a long period of time?
Disability insurance replaces income lost due to injury from a catastrophic accident or illness beyond 90 days. It generally replaces 60 percent of the policyholder's income from the previous year, up until retirement age (normally around 65 years-old). Chris Peck, CEO of Stamford, Conn.-based CBP, an insurance brokerage firm that works with small and medium- sized businesses, says that disability insurance is usually not on a business owner's radar, but it should be. "A business owner's greatest asset is their earning potential," Peck says.
Related: Quick Guide to Reduce Insurance Premiums and File Effective Claims
When considering disability insurance, consider these factors.
1. Assess your risk.
Peck suggests speaking with several insurance agents to discuss
your specific needs. "You want to make sure you're not spending
unnecessary premiums for risks you may not have," he says.
Insurance companies consider a number of factors to quantify
risk, says Katherine Woodfield, a New Jersey-based consumer
advocate and author of Don’t Buy That Health Insurance
(Dog Ear Publishing, 2012). For example, insurers have a
Standard Industry Code for every occupation, which is used to
consider characteristics of which industries are consider
high-risk.
2. Apply while you're healthy.
Buy disability insurance before you need it -- when you're
healthy. Many policies require medical underwriting which may
include a review of your medical records, blood tests and a
physical.
3. If you have an older policy, consider
stacking.
If a healthy 20-year-old purchases disability insurance and holds
onto it into her 40s, she may be making three times what she did
when she got the policy and therefore would have more income to
replace if she was injured. Assuming the owner has a good rate,
Woodfield suggests keeping the first policy and “stacking” it
with another policy to cover the difference in income.
4. Figure out your average income.
The amount of disability insurance you're eligible for depends on
your net income. With entrepreneurs, whose income levels may vary
from month to month, it's tricky for insurance companies to
figure out what their predictable income is, Woodfield says. In
that situation, an insurer may ask you for your last three years'
of tax returns and divide the amount by 36 months to arrive at
your average monthly income.
5. Drop your policy when you hit retirement
age.
If you're over 65, there's no point in paying for disability
insurance, Woodfield says. For example, if your doctor diagnoses
you as disabled at age 65, you will be considered retired and the
insurance policy won't pay. So once you hit retirement age, even
if you are still working, drop your policy.
6. Comparison shop.
Both Peck and Woodfield recommend speaking to several advisors,
preferably independent consultants who work with a number of
insurance companies. Ask the advisor whether there are any
questions (for example a family history of cancer) on a specific
insurance policy that would automatically disqualify you from
coverage.
Make sure you know the policy's definition of disabled, as the definition may vary among carriers. Also, find out which insurance carriers the advisor has access to, and ask them to perform a needs-analysis for you. A needs-analysis reviews expenses such as mortgage, car payment, debts, savings and retirement to calculate what you would need in the event of a disability. View a sample need-analysis worksheet here.
7. Don't choose on price alone.
"Consumers need to be really aware that the prices are aligned
with the features and benefits of the policies," Woodfield says.
If you're a small-business owner, you may want to consider
applying for group coverage for your employees, with policies
that don't require medical history.
According to Peck, a middle-of-the-road individual policy may cost $2,000-3,000 in premiums per year, while group coverage for ten employees can cost $300-500 for the entire group.
Related: Business Interruption Insurance: What It Will -- and Won't -- Cover
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