Two disability policies, two purposes

Despite the prevalence of disabilities, individual disability insurance coverage - including business overhead expense insurance - remains one of the most overlooked planning tools in a financial advisor's toolkit.

According to the Social Security Administration, a worker who is 20 years old today may face a roughly 1-in-4 likelihood of becoming disabled before reaching retirement age. For business owners, the consequences can be even greater: Not only can business owners lose their personal income, but they can also lose the business they've spent years building.

As a financial advisor and business owner myself, I carry both disability income insurance and business overhead expense insurance. When I started in business, taking out these policies was a way to learn the process firsthand, from quoting to underwriting to reading my own policy documents. The coverage has stayed in place as my practice and staff have grown. Understanding the role both types of coverage play in a comprehensive protection plan starts with knowing what each one is designed to cover.

The core difference: What each policy is protecting

In simple terms, disability income insurance protects the owner's paycheck, while BOE insurance protects the business's ability to keep operating while the owner is out.

Disability income insurance is flexible in terms of who can hold it: employees, contractors and business owners alike. It is typically structured to replace a meaningful portion of income, frequently cited in the range of 60% to 70%, depending on the policy and underwriting. For business owners, the coverage is often calculated closer to net income. Benefit periods typically run through age 65 or 67, with an elimination period of 90 to 180 days.

BOE insurance is intended to help cover eligible fixed operating expenses - such as rent, employee salaries, health insurance, utilities and other operating expenses - when the owner is unable to work. It carries a shorter elimination period, often 30 days, and a shorter benefit window, typically 12 to 24 months. But coverage activates faster and may help protect the infrastructure of the business itself.

Who may benefit from both, and when to raise it

Any business owner with employees, meaningful monthly overhead or both may want to consider carrying both policies. A firm with 2-10 employees is a common example: large enough to have operating costs that would continue without the owner, but small enough that the owner's absence would be felt immediately.

A great moment to introduce this conversation is during the discovery process, through open-ended questions that surface the client's situation naturally. One technique I use when communicating with clients is to avoid the word "disability" in the conversation altogether. The word carries a negative connotation for many people, who may associate it with a worst-case scenario rather than the far more common reality of an illness or injury that simply keeps someone out of work for a period of time.

Instead, I ask feeling-based questions: Do you know anyone who has been sick or hurt and missed work? How did that make you feel? What did you observe? Most importantly, what is your plan if that happened to you?

The goal is to get clients talking about their own experience with illness or injury before introducing the product, so the need becomes personal rather than theoretical.

The scenario most advisors don't plan for

Not every disability takes someone out of work completely. Some are partial, meaning the insured can work, but not at full capacity or full income.

A client managing a health condition might work 20 hours a week for months before recovering fully or find themselves gradually working less rather than more. That's why policies may include partial disability riders that may provide proportionate benefits even when the owner is still working in some capacity, rather than requiring total disability to trigger a claim. Meanwhile, BOE may be available to help cover the fixed costs of running the business regardless of how many hours the owner can put in.

Buy-sell disability insurance is another aspect to consider as part of a business protection plan. When two partners own a business together and one becomes disabled and unable to work, the situation may become more complex from a legal and operational standpoint, particularly if arrangements are not pre-funded or documented in advance. Without a funded buy-sell arrangement in place, the surviving partner, the disabled partner and potentially a spouse may find themselves navigating an unplanned business transition.

The bigger picture

Both disability income insurance and BOE policies can be structured to grow alongside the client. As income rises or the business expands, coverage may be eligible for future increases without additional medical underwriting, depending on policy provisions. This keeps the policy current without the risk of being denied based on a change in health.

Advisors often consider disability to be an important part of the planning discussion. At the core of most clients' financial plans is their ability to earn an income and keep their business running. These policies exist for exactly that, and clients can benefit from having the chance to make an informed decision.

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Todd Parker is a partner at Lenox Advisors. Contact him at [email protected].