Did you know that there is a one-in-three chance of being disabled for a period of at least 90 days before age 65[1]? That’s eight times the risk of premature death. The statistics also include disability leave as a result of mental health issues:
As a business owner, you may have a plan for life insurance, but have you considered what might happen if you, a co-owner, or a key person is disabled? Every business is exposed to a degree of risks and it’s critical to reduce its exposure where you can. For this reason, disability insurance should be a critical part of a business’ risk mitigation strategy.
This type of insurance could very well spell the difference between a costly business interruption should you or a key person become disabled, or a business that continues to operate successfully during your absence. If you are looking for disability insurance for small businesses in Calgary, here’s what you need to know.
Why do you need disability insurance for your business?
Disability insurance can give you (or your business) a tax-free monthly payment to help replace income and cover your expenses if an illness or injury keeps you or a key person in your business from working. It transfers the financial risk associated with a serious disability from you to an insurance company.
Keep your business going
Disability insurance for the small business helps make sure expenses are covered and your company runs smoothly. If you are temporarily unable to work, your business might have significantly less revenue coming in because of your inability to provide the services your clients and customers need.
Regardless of your ability to earn income, you would still be responsible for your overhead expenses, including (but not limited to):
- Rent or mortgage payments
- Employee salaries
- Loan payments
- Insurance premiums
- Utility bills
Business overhead expense insurance is designed for principals of closely held businesses or practices and owners of small businesses. It is most vital for businesses and practices in which the owner’s ability to generate income makes the difference between the office being open or closed for business.
How does it work?
Business overhead expense insurance is an expense reimbursement policy that covers the fixed monthly overhead expenses required to keep a business running until the return of the insured owner, after a period of disability.
Benefit payments are limited to actual expenses incurred. Some eligible business expenses include:
- Rent or lease payments
- Interest on loan payments
- Insurance premiums
- Utilities
- Custodial services
- Payroll for employees
- Tax obligations
Protect your key people (including yourself)
The loss of the owner and other key persons can significantly impact the profitability, stability, and progress of a business. During the disruption that may result from their extended leave from work, some common issues can arise:
- Employees and customers may lose confidence in management
- Creditors may demand payment
- Other key employees may be enticed to look for other career opportunities
- Lenders may be less willing to provide credit
Key persons, particularly in small businesses are not readily replaced and the delays in recovering from their loss can be catastrophic.
How does it work?
The company purchases a disability insurance policy for the key person(s) in the organization. The company pays the premiums and is the designated beneficiary should a key become incapacitated. The company can then use the insurance benefit, which it receives tax-free, in whatever manner deemed fit to ensure the viability of the business, such as hiring or training a replacement or offering financial assistance to the disabled person, or paying off creditors who may call outstanding loans or increase interest on the debt (depending on how valuable the person is to the core functions of the business).
Group Benefits
Your employees and their health are one of your most important assets. While Canadians have some protection under our national healthcare program, there are a lot of unforeseen costs and financial worries associated with long-term illness and accident-related emergencies. To help provide income in the event of disability, many employers offer their full-time employees a group of short and long-term disability coverage as a benefit.
How does it work?
Group disability plans typically provide the totally disabled employee with up to 60% of pre-disability income to a specified maximum. Coverage is available for both short and long-term disabilities and often without medical evidence of insurability. Group disability insurance helps attract and retain quality employees and is tax-deductible to the business.
The first decision a company needs to make when approaching a disability plan offering is to decide who is paying for this coverage. Often a large company will cover the entire premium costs. However, it is not uncommon for a smaller company with a more limited budget to shift the cost of short-term disability coverage to the employees through payroll deductions.
Fund a buy/sell agreement
Your business’ success depends on the productivity of a core team of partners—if you or one of them becomes disabled, your business can suffer. You can help protect your business with Buy-Sell disability insurance to finance the buy-out of a disabled partner.
The disabled person may need the cash or if they aren’t able to contribute to the well-being of the company in the long term, animosities can arise, and relationships can become strained. The company or partners may not have the money or ability to obtain a loan to buy out the disabled partner. This further highlights the benefits of having a disability insurance policy as the funds can be available when needed.
Note: With a buy-sell, there are specific clauses that trigger a buy-sell arrangement to activate, making the decision easier for all parties. The type of insurance is suitable for businesses with two to five owners who control at least 10% of the business and work there full-time.
How does it work?
The disability buy-out arrangement will guide the structure of the insurance policy. For example: after a specified period of total disability (generally 12 months), the buy/sell agreement is triggered to start the sale of his/her share of the business. The business then makes the disability claim and uses the proceeds to buy the shares from the disabled partner.
The money from the disability claim can be received either as a lump sum or through an income stream to purchase the disabled owner’s share of the business.
The right advice makes all the difference.
Regardless of how well your business is running, the truth of the matter is that there are always risks lurking in the background that threaten your well-planned out strategy. As an independent insurance broker, we are here to help you mitigate those risks to ensure the longevity of your business and protect you and your workers. We can advise you on disability insurance for the small business along with other wealth management strategies including an insured retirement plan, tax & debt hedging, charitable insurance, and much more.
As with any decision regarding your business, speak with our business advisory team to make sure your decisions are well-informed and aligned with your overall plan.
[1] RBC’s Ipsos survey in 2015
[2] Mental Health Commission of Canada (MHCC)Making the Case for Investing in Mental Health in Canada.
[3] Mental Health Commission of Canada (MHCC)
[4] Mental Health Commission of Canada (MHCC)