Business owners need to be prepared in the event of a medical setback
By Carl Cease
What is your most valuable financial asset? If you answered your house, retirement account or perhaps vehicle, you would be in good company. But you’d be wrong. Your most valuable financial asset is your ability to work and generate income.
Here is why: Assume a working career from age 22 to 67 with an annual salary of $50,000 per year. That equates to a lifetime earned income of $2,250,000, and doesn’t take into account any annual raises, bonuses or K-1 distributions a business owner might take. What if that income were to suddenly dry up?
You insure your home and car. Shouldn’t you insure your largest asset?
That’s what an individual disability income (IDI) policy is for! These polices provide a means of income to pay your bills if you are not able to work, possibly due to an auto accident, a medical or mental diagnosis, or falling down a stairway.
So how does an IDI policy work? In its most basic form, the policy insures a portion of your income for a set period. For instance, a policy could be designed to replace 60% of your income for a maximum period of five years. The portion of income replaced and length of payout are all variable and can be customized within certain guidelines. No IDI policy will replace 100% of pre-disability earnings, which is by design. The insurance company wants to incentivize the insured to return to work!
IDI policies are complex, and as is the case with all insurance, it pays to know what questions to ask. Here are some to consider:
What is the definition of “disability” for a policy you are considering? What you consider a disability and what the insurance company thinks might not be the same. Find out prior to purchasing a policy rather than when your claim is denied.
Is the policy’s occupation clause an “own occupation” or “any occupation”? This relates to your ability to work after you have recovered from your disability. You may be unable to work in your previous position but can work in one that provides less income. Ask the financial professional you work with to provide a more thorough explanation of this critical point.
Will your pre-disability earnings be defined by the most recent 12 months? The highest paid 12-month period over the past 36 months? Some other formula? This is critical information!
How is a partial disability claim evaluated?
A partial disability is when someone is not totally disabled and can perform some of the duties of her/his job. Many partial disability claims involve back issues. For someone who sits most of the work day, a herniated disc would be disabling because she/he may only be able to tolerate sitting a few hours a day. Most claims against an IDI policy are for partial disability. It is crucial to know how this scenario is evaluated.
These tips apply to an individual policy, but there are other business-related types of disability insurance. Business overhead expense insurance pays a part of an owner’s business expenses if she/he is disabled and cannot work. A buy-sell disability policy can finance the purchase of the business interest of one owner by another if she/he is disabled. These are more specific applications of disability insurance, and are vital for a well-managed business.
Disability insurance is a complex purchase, and details count in policy language. Make sure the professional you work with explains in great detail what you are purchasing. Or find someone else to work with!