Chances are you started your small business with long days and longer nights. You are fully aware of the truth of the old saying: “When you are self-employed you work for the toughest boss in the world!”
But if you are carrying your business on your shoulders, who is carrying you? More precisely, who will carry you if you are no longer able to carry yourself?
Unless your business has reached the point where it can run itself, you have a financial crunch coming if an accident or illness renders you unable to work, either permanently or for an extended time.
Since it’s often hard to imagine yourself in such a position, try this quick, mental exercise: Imagine you have just won an all-expenses paid vacation. Congratulations! You can go anywhere you like for up to two full weeks. Will your business do just fine without you? If so, try four weeks. Keep going until you hit the “No way I can stay away that long!” wall. Now you know the approximate length of time you trust your business to keep running without you with no appreciable falloff in revenue or income to you.
In the event you fall ill or are disabled, and it lasts longer than the time you arrived at in the preceding exercise, what is your fallback for income? Savings? Pension plans? Family? Beyond the obvious emotional and possible tax consequences of these options, are any or all of them truly adequate? And, what if you’ve already drained these options investing in your business?
There is an answer. Talk with your insurance agent about disability income coverage. As the name suggests, this coverage provides you with some amount of continuing income during the time you are disabled. As with all types of insurance, there are many variations in amounts, length of time benefits will be paid, and what types of accidents or illness will trigger your coverage.
Three questions are critical to determine if the policy you select will meet your needs.
First, what is the definition of disability in the policy? Be certain it matches your needs and your occupation. For example, if you believe you can continue working profitably unless you are totally laid up (although this is rare), a stringent definition of disability may suffice. If what may be a minor injury to one person would cripple your ability to earn an income, be sure your policy reflects that. For example, if you are a left-handed master carpenter, a severe injury to your left hand may result in total loss of your ability to earn a living, or at least until you’ve undergone considerable retraining. For a left-handed professional speaker, the same injury may be just as painful physically, but has little or no impact on that person’s ability to earn an income.
Second, how long can you afford to wait before you need the income provided by the policy? The longer this “waiting period”, the less expensive your coverage will be. Possibly you have a short-term disability plan in place with your business that will pay for the first few weeks. If so, set your personal plan to begin paying benefits after your short-term benefits expire. Also consider how long your business can survive without you and still pay you a regular income. Remember, though, there is a limit to how long any non-productive employee, including you, can continue to take money out of a business before you begin harming its ability to survive and grow.
Third, how long will the benefits continue once you qualify? As with all insurance, consider this a safety net for the losses you cannot afford to bear alone. For disability income, this means you should seriously consider a policy that provides benefits from the time your income coverage begins (after the waiting period) until you retire—usually the policy will say “to age 65”. If this is not an option, look for the longest benefit period you can obtain. Two to five years is the most common, but these often assume you will find some way to return to work or qualify to receive disability benefits under Social Security. Be forewarned—the definition of disability in the Social Security law is extremely stringent. Basically, you must be unable to earn any kind of income. For example, our carpenter above may well be disabled under the definition of his personal policy, but be denied Social Security benefits because he could still work as a night watchman at a construction site.