Insuring to Keep Business Going : Entrepreneurs are reluctant to think about personal injury, and persuading them to buy disability insurance is tough, agents say.
Four years ago, Bob Page’s car was hit head-on by a drunk driver. The drunk driver died. Page survived--but suffered 15 broken bones and a bruised heart.
For five months after his release from the hospital, Page had to use a wheelchair, depending on his parents, friends and employees to keep Replacements Ltd. going. His Greensboro, N.C., firm, which specializes in supplying customers with obsolete china, crystal and silver patterns, survived his personal disaster and has flourished.
But not all small-business owners are as lucky as Page.
“I had personal disability insurance that paid about $1,000 a month,” Page said. “My salary continued because I owned the company, and I was lucky to have people around me to help run the business.”
Hard-driving, passionate entrepreneurs are especially reluctant to think about what would happen to their businesses if they were disabled. So persuading them to buy personal disability insurance is tough, insurance agents and executives say.
Yet, a busy entrepreneur risks losing everything if he or she is unable to work and is not properly insured.
“There are two forms of death,” said John Swenson, who specializes in disability issues at New York Life Insurance Co. in Manhattan. “One form is where the insured dies and the family is left to work things out. The other, more agonizing, death is when the individual becomes disabled and there is no income.”
Insurance executives believe that 60% to 70% of the nation’s small-business owners have no personal disability coverage. This is a chilling estimate when you consider that at age 37--the prime age for an entrepreneur--the probability of becoming disabled is 3 1/2 times higher than the probability of death.
Many small-business owners, already stretching to meet payroll and production costs, may think they are saving money by not buying disability insurance for themselves. But the premiums are surprisingly affordable and the benefits available are tailored to meet individual needs. (See chart).
Virtually all personal disability policies offer the same kinds of benefits. Disability insurance policies generally pay a monthly benefit that is slightly less than what you would earn if you were healthy and working. This gap is intentional; insurers want you to have an incentive to get well and get back to work.
The kind of policy you qualify for depends on what you do for a living. Professionals, such as attorneys and architects, have the easiest time buying disability insurance. Automobile and real estate salespeople, subject to the ups and down of the economy, have a tougher time. People in risky professions, such as private detectives, construction workers, actors and stunt car drivers, may have to look a long time for a policy.
“The underwriter looks at the likelihood of the person being disabled and how long they will stay on disability,” explained Harris Kagan, a New York Life insurance agent in Santa Monica.
“An agent needs to know how much money you need to protect your mortgage, debts, wife, husband and children,” Kagan said.
You can save money on the premium by being willing to wait 60 to 90 days after the disabling event for the insurance benefits to kick in. The purpose of this “elimination period” is to remove some of the incentives for the insured to begin collecting disability benefits.
“The longer a person has to go without receiving income from their normal job, the less incentive they may have to claim a disability,” said Danny Lerner, a partner at Commercial Benefits, a Woodland Hills firm specializing in individual and business insurance planning.
Disability insurance underwriters also consider the number of employees you have, the length of time you’ve been in business and the claims history in your industry.
“The question they ask is, ‘Does this person have an incentive to be disabled?’ ” said Lerner.
Lerner said Californians have the toughest time obtaining disability coverage because claims here have “gone through the roof.” Californians tend to file an extraordinarily high number of disability claims stemming from mental stress and drug abuse.
Normally, disability benefits are tax-fee. But if your company pays for the premium and takes a tax deduction for the expense, your benefits will be taxed. To avoid this, most insurance planners recommend paying for the policy with personal funds.
It is also important to make sure the policy covers your specific occupation, not just any occupation. This means if you are president of a tool manufacturing company and you suffer a heart attack that prevents you from doing your old job, you can still be paid your benefits even if you take up a less-taxing, lower-paying occupation later.
Although it’s cheaper to buy a policy that provides benefits to age 65, Lerner recommends paying a bit extra for a policy that provides lifetime benefits.
Meanwhile, Bob Page is fully recovered and busy running his growing company. Since his accident, Page increased his own disability benefits coverage to $5,000 a month and recently purchased long- and short-term disability coverage for his 160 workers.
BUYING DISABILITY INSURANCE * Figure out how much money you need to cover all your personal, monthly expenses. * Obtain estimates from several different insurance carriers. * Check the financial stability and strength of the company you choose to deal with. * Although it costs more, it pays to buy a policy providing lifetime benefits. * Consider buying business interruption coverage to further protect your business from collapsing after a disaster.
DISABILITY INSURANCE: THE NUMBERS Disability insurance is cheaper than you think. Here are premium estimates for a hypothetical small-business owner who is 35 and a nonsmoker. He or she owns a retail store and has some supervisory duties. These premiums are for a basic policy that pays benefits until age 65. The individual pays the policy and must wait 90 days for the benefits to go into effect.
Annual gross income Basic monthly benefit Annual premium $30,000 $1,850 $757 $60,000 $3,300 $1,323 $100,000 $4,800 $1,908
Source: New York Life Insurance Co.
A non-smoking, 35 year-old professional male or female, such as an architect or attorney, would pay less for the similar coverage with benefits lasting until age 65.
Annual gross income Basic monthly benefit Annual premium
$30,000 $1,850 $581 $60,000 $3,300 $993 $100,000 $4,800 $1,399
Source: Commercial Benefits
