Personal Finance Essentials

Insurance for Business Owners

Your Business Can’t Survive If You Can’t

What You Need, and When to Get It

EntrepreneurInsurance

Your largest financial asset is not your house, your business, or your retirement accounts. For anyone still working, the most valuable asset you own is your ability to produce income. Think about what that income stream is worth over the course of a career, and then ask yourself what happens if it suddenly stops.

According to the Council for Disability Awareness, nearly six in ten American workers say they would be unable to pay their bills within three months if an injury or illness forced them to stop working. Yet 70% of workers in the private sector either have no long-term disability coverage or believe their coverage is inadequate.

For these reasons, disability income insurance (DI) is the most important type of insurance most people will ever own.

Disability Insurance: Buy It Before You Leave Your Job

If you plan to become self-employed, timing matters enormously when it comes to disability insurance. Insurance companies verify a steady, documented source of income before issuing a DI policy. When you’re brand new to self-employment, your income is effectively zero — and you will not be eligible for coverage for at least two years, during which time certain conditions must be met.

This creates a window of serious vulnerability: the period right after you leave your employer is exactly when you are most financially exposed. The solution is straightforward but requires planning. Buy a non-cancellable disability income policy while you are still employed. Do not wait until after you’ve already made the transition.

The DI Premium Tax Trap for Business Owners

If you’re a business owner, you have the option to deduct your DI policy premiums as a business expense. This sounds appealing — a tax deduction now in exchange for paying for coverage you need anyway. Don’t do it.

When an insurance company pays a disability claim, those benefits are normally tax-free. But if your premiums were treated as a deductible business expense, the IRS will treat the benefits you receive as taxable income. You save a little on taxes now but pay far more if you ever need to use the policy.

Business Insurance Essentials

Every business faces risks beyond the owner’s personal disability. Here are the essential coverage categories every business owner should address:

Key Man Coverage

If your business depends on a specific employee, or on you personally, losing that person could mean losing substantial revenue. Key man life and disability policies pay the business a lump sum to cover recruitment costs and financial losses while a replacement is found and trained.

Business Overhead Expense (BOE) Coverage

BOE insurance pays your business’s ongoing bills — rent, utilities, and staff salaries — while you or a key employee is unable to work. This is particularly important for professionals in private practice: physicians, dentists, attorneys, and consultants. It keeps the lights on and the staff paid while you recover, giving you time to hire a replacement or return to work without the business collapsing around you.

Cash Management and Credit Lines

Cash flow is vulnerable to customer defaults, market disruptions, and unexpected operational disruptions. Establishing bank lines of credit and maintaining adequate cash reserves before you need them is a basic business survival strategy, not a luxury.

Umbrella Liability Coverage

Most auto and homeowner’s insurance policies cap liability coverage at $500,000 or less. For most business owners, liability from lawsuits represents the largest single financial risk they face. Umbrella liability policies typically cost under $250 per year for $1 million in coverage. For the price of a modest dinner out each month, you can dramatically extend your protection against the kind of lawsuit that could otherwise wipe out everything you’ve built.