Benefits of disability insurance for business owners.
Business owners don’t think twice about insuring physical assets like property and motor vehicles, but many neglect to take out insurance for their most important asset of all: their employees. Death, disability, illness or injury to a key employee can play havoc with the best-laid plans and financial stability of any business.
If a company’s key person is off work for an extended period of time, or unable to return to work at all, the impact can be devastating. Profits and goodwill can be lost as you look for ways to cover and replace the missing employee.
Disability insurance, however, is designed to help protect your business in this type of situation. It provides an injection of cash which you can use to protect your assets, cover lost revenue, fund a transfer of business ownership or even hire and train a replacement employee.
In short, disability insurance is a vital consideration for any business.
Why is it Important for Small Business Owners to Have Disability Insurance in Place?
Despite the fact that many Australian small businesses are under-insured, disability insurance has many key benefits for business owners. For starters, when you consider how even relatively minor conditions, for example glandular fever or a broken limb, can take an employee out of action for weeks or possibly months, it quickly becomes obvious just how easily things can start to affect your business.
And if a key employee suffers a major illness or injury and is off work for an extended period, the financial impact on your business can be substantial. Key business decisions might not be able to be made, important contracts can go unsigned and profits can be lost.
What is Disability Insurance?
Disability insurance is designed to protect your business against the impact of illness, injury and death. It provides a benefit payment to give you the funds you need to maintain the strong financial position you’ve worked so hard to achieve.
You can use the funds to protect your personal and business assets, or perhaps to cover any revenue lost as a result of the business owner or employee being off work. Alternatively, these funds may be used to organise a smooth transfer of ownership of the business, which can be especially helpful in situations where a business partner dies or becomes permanently disabled and can no longer perform a role in the business.
Finally, the proceeds of disability insurance can be used to find and hire a replacement employee, then train that new employee up to a suitable standard. With all its possible uses, disability insurance is an essential form of cover for any business.
Different Types of Disability Insurance Plans to Protect Business Owners
- Life Insurance: This type of cover provides a lump sum payment if you or a key person in your business passes away. It offers peace of mind that your business will be protected if the worst happens.
- Total and Permanent Disability (TPD) Insurance: If you or a key person in your business becomes totally and permanently disabled and are unable to work again, TPD cover provides a lump sum benefit payment.
- Critical Illness Insurance: If you or a key employee suffers or contract a critical condition, Critical Illness Insurance provides a lump sum payment. Common conditions covered under this type of policy include heart attack, cancer and stroke.
- Income Protection Insurance: This type of cover kicks in when you or someone else in your business are ill and temporarily unable to work. When this happens, income protection cover provides a monthly benefit equivalent to 75 per cent of your regular income until you can get back on your feet.
- Business Expenses Insurance: This type of disability insurance is designed to cover up to 100 per cent of your business overheads if you are temporarily unable to work because of illness or injury.
Is Disability Insurance Tax-Deductible for Small Business Owners?
For business owners looking to take out Life Insurance and TPD Insurance, taking out the cover through a superannuation fund rather than outside super might be a more tax-effective strategy.
If you’re taking out insurance cover to help you repay business debts, release a loan guarantee, fund a Buy/Sell agreement (a written agreement that sets out each business owner’s obligations concerning the transfer of the business equity) or equalise your estate, owning your policies through your super could be the way to go.
When insuring inside super it’s possible to benefit from a range of upfront tax concessions. If you earn less than 10 per cent of your income from eligible employment—in other words, if you’re self‑employed—you can claim your super contributions as a personal tax deduction. Importantly, you can claim them as a deduction whether they’re used within your super fund to purchase investments or insurance.
In addition, if you run your business through a company or trust and you sacrifice a portion of your salary into super, you can purchase insurance in your fund with pre-tax dollars. This helps you save money in the long run.
Another useful feature of insuring through your super is that you can elect to receive the TPD or death benefit as an income stream instead of a one-off lump sum payment. Receiving an income stream may not suit all business purposes, but it will let you avoid paying lump sum tax.
Level or Stepped Premiums? Choosing the Right Disability Insurance Premium Structure for Business Owners
When taking out disability insurance for your business, another strategy you’ll have to decide on is whether to choose stepped or level premiums. Depending on your situation, either option could reduce the cost of your insurance cover in the long run.
Stepped premiums are calculated each year in line with your age, while level premiums stay the same each year as they are based on your age when the cover was first taken out. In most cases, level premiums cost more than stepped premiums at the start of your policy. But stepped premiums will increase over time and level premiums can actually end up being cheaper overall, and level premiums will most likely be cheaper than stepped premiums at the time in life when you need cover most.
Of course, it’s important to remember that the earlier you lock in a level premium, the greater your savings will be in the future. Because of the certainty they provide, level premiums can also make it easier to organise budgets and manage your finances.
Some businesses choose to take out some cover using stepped premiums and the rest with level premiums. This can help you save money on premiums in the early years of your insurance cover, and then you can reduce your stepped cover later on in life so you’re mostly paying level premiums.
However, remember that different strategies will work for different businesses, so seek expert advice from an insurance consultant to find out which option will work best for you.
Tips for Buying the Right Small Business Owners’ Disability Insurance
- Finding the right level of cover: How much disability insurance do you need and how much can you afford? Review your assets, liabilities and expenses to determine how long your business would be able to survive running at less than full capacity. What works for one business might be completely impractical for another, so seek expert advice from an insurance consultant.
- Defining disability: Different insurance providers have different definitions of what constitutes a disability. Some will define it in terms of your own occupation and others will define it in relation to your ability to perform any occupation. Read the PDS closely and make sure you understand what each policy does and does not cover.
- Inflation indexation: Check that your level of coverage will rise each year to keep pace with inflation.
- Check your industry association: Depending on your profession, some industry associations will offer access to group insurance policies at reduced rates. This may be a way for you to save a little bit of money.
- Extending the waiting period: How long can you afford to survive before your cover kicks in? Extending the waiting period can help lower your premiums.
- Review your existing policies: If you already have life insurance or other policies in place, you may be able to add disability coverage to the insurance you already have.
- Seek expert advice: Buying insurance can be like tap dancing through a minefield, so seek advice from an insurance broker or consultant to ensure you end up with the right level of cover at the right price.
Enquire Now for a Disability Insurance Quote for Business Owners
Disability insurance is a vital consideration for business owners. Illness, injury and even death can have a huge impact on the financial position of your business, causing profits to drop and all sorts of difficult problems to arise.
Disability insurance can help protect your business from the upheaval caused by unexpected events, providing an injection of cash to secure the financial standing of your business. Disability insurance benefits can be used for a range of purposes, from repaying debts to hiring and training a replacement employee, and this type of cover offers peace of mind to business owners.
Before taking out cover, however, make sure to speak to an insurance consultant to get tailored advice.