Disability Insurance: Why Business Owners May Benefit from Protection

Introduction: The Often Overlooked Pillar of Business Planning.

Disability Insurance can be one of the most important, and most often overlooked components of a comprehensive business plan. For many entrepreneurs, the business is more than just a job: it may represent years of effort, personal sacrifice, and financial investment. It may provide income, personal fulfillment, and, in some cases, a significant portion of the owner’s net worth.

Yet all of this could be at risk if the owner becomes too sick or injured to work for an extended period. Unlike employees, business owners often do not have the built-in safety net of employer-provided disability benefits. If the unexpected occurs, the loss of the owner’s ability to generate income may create significant financial strain.

Cash flow can decline quickly. Client work might be delayed or canceled. The ability to meet payroll, rent, and other essential expenses could be compromised. In certain circumstances, the business may even face the possibility of closure. Even businesses that appear financially strong can be vulnerable because regular income interruptions can make it difficult to meet recurring obligations.

A thoughtfully structured disability insurance plan can serve as a financial support system potentially allowing operations to continue, obligations to be met, and the owner’s personal finances to remain stable. This type of coverage may provide the breathing room needed to focus on recovery without the pressure of making urgent or less-than-ideal financial decisions. In this way, disability insurance may help transform a period of uncertainty into one of stability, offering the possibility of protecting both the business’s reputation and the owner’s personal well-being.

Why Disability Insurance May Be a Key Part of Business Planning

When business owners think about managing risk, they often prioritize property coverage, liability insurance, or life insurance. While these protections are important, disability insurance does not always receive the same level of attention, even though it may guard against a risk that statistics suggest is more likely than premature death.

Industry data indicates that many working individuals may have a greater likelihood of experiencing a disability lasting 90 days or more before age 65 (source) than of dying during their working years. (source) For business owners whose responsibilities are deeply tied to daily operations, revenue generation, and decision-making, the potential impact of such a disability can be especially significant.

The consequences may extend well beyond the owner’s personal finances. A sudden inability to work could affect employees, customers, suppliers, and family members. Without planning ahead, years of effort might be undermined in a relatively short time. The resulting disruption might also hinder future opportunities, such as securing contracts, launching new products, or entering new markets.

A well-considered disability insurance strategy can help address this gap, providing a level of protection that may be critical for entrepreneurs who serve as both the operational and financial backbone of their enterprises. By preparing for this type of risk in advance, business owners can position themselves to respond more effectively to unexpected changes.

What Could Happen Without It?

Without disability coverage, the financial and operational effects of illness or injury may be severe. Potential challenges could include:

• Reduced revenue – If the owner is a primary source of sales, production, or client relationships, income can decline rapidly.
• Operational disruption – Key decisions may be delayed, projects might slow, and client service could suffer.
• Cash flow challenges – Rent, utilities, salaries, and other expenses typically continue regardless of revenue.
• Loss of clients – Extended absences may prompt customers to seek alternative providers.
• Difficult financial trade-offs – The owner might have to sell assets, take on debt, or even consider closing the business.

For example, a small marketing agency led by a single creative director could struggle to keep clients engaged without their involvement in strategy sessions. A manufacturing company run by a founder who manages quality control may face production delays, potentially leading to lost contracts. Professional service providers — such as architects, consultants, or medical practitioners — might see work stall completely if they cannot meet with clients or perform specialized tasks.

In many cases, the loss of continuity can have a compounding effect: as revenue declines, the ability to retain top employees may be reduced, which can further weaken the business’s capacity to recover.

Why Entrepreneurs May Be Especially Vulnerable

Entrepreneurs can face unique vulnerabilities when a disability occurs:

• Many rely heavily on their own expertise, relationships, and leadership to drive results.
• Personal income is often directly tied to the performance of the business.
• There may be no trained replacement who can immediately step into the owner’s role.
• Owners are sometimes personally liable for certain debts, meaning business difficulties could spill over into personal finances.

In addition, entrepreneurs often reinvest profits into their businesses rather than building large personal reserves. While this approach can fuel growth, it might leave less liquidity available during a health crisis. Without a financial cushion or insurance protection, the business may need to take on debt or sell assets to survive. This may be particularly challenging during broader economic downturns, when credit may be harder to obtain, and customers may already be scaling back.

For small business owners, the absence of one person can sometimes halt critical functions entirely. Even if a manager or employee can take over certain tasks, specialized knowledge or relationships may be difficult to replicate quickly. This means the window for implementing solutions can be short, and the risk of lasting damage to the business may increase as time passes.

Types of Disability Insurance Business Owners May Consider

Different policies serve different purposes, and in many cases, a combination of coverage types might be appropriate.

1. Individual Long-Term Disability Insurance

This policy can replace a portion of personal income if illness or injury prevents the owner from working. Benefits are typically paid directly to the insured.

Possible Features:

• May replace around 50–70% of pre-disability income.
• “Own-occupation” definitions might allow benefits if the insured cannot perform their specific job, even if they can work in another role.
• Premiums may depend on age, health, occupation, and desired benefit level.

For business owners whose livelihoods are tied directly to their personal productivity, this form of coverage can be an important safeguard against personal financial instability.

2. Business Overhead Expense (BOE) Insurance

BOE coverage can help pay for fixed operating costs during a disability.

Expenses That May Be Covered:

• Rent or mortgage payments
• Utilities
• Employee wages and benefits
• Insurance premiums
• Office supplies and maintenance

Covering these ongoing costs can be critical to preventing a temporary health setback from forcing permanent business closure.

3. Key Person Disability Insurance

This coverage may help a business cope financially if a critical employee — whether or not they are the owner — becomes disabled.

Possible Uses:

• Offset revenue loss.
• Hire and train a temporary or permanent replacement.
• Maintain relationships with clients and vendors.

In businesses where a single person holds specialized skills or exclusive client relationships, the absence of that person could be particularly disruptive.

4. Disability Buy-Out Insurance

This coverage may provide funding for a buy-sell agreement in the event a partner becomes permanently disabled. It could allow the remaining partners to purchase the disabled partner’s share without severe financial strain.

Without such coverage, the remaining owners might need to secure costly financing or bring in outside investors, potentially changing the business’s direction.

How Disability Insurance Can Support Business Continuity

The right disability coverage may do more than replace income — it can contribute to keeping a business functional during a period of disruption.

Potential Benefits Include:

• Sustaining day-to-day operations.
• Maintaining payroll to retain key employees.
• Preserving vendor and customer relationships.
• Helping avoid the need for asset liquidation or high-interest borrowing.
• Supporting the business’s market position and reputation.

By sustaining stability, coverage may also help reassure stakeholders — from employees to suppliers — that the business has the resources to weather unexpected challenges. This can be vital to maintaining trust and loyalty during uncertain periods.

What to Review When Considering a Disability Policy

Business owners may want to evaluate:

• Policy definitions – Own-occupation coverage may be more favorable for specialized fields.
• Elimination period – The waiting time before benefits begin.
• Benefit period – How long benefits can continue.
• Monthly benefit – Whether it can cover essential personal and business expenses.
• Optional riders – Adjustments for inflation, partial disability coverage, or benefit increases.

Owners might also consider whether benefits are adjusted for cost-of-living increases, how residual or partial disability is defined, and whether the policy offers options to increase coverage as income grows.

Common Pitfalls to Avoid

• Assuming group coverage will be sufficient.
• Underestimating how long recovery may take.
• Overlooking BOE coverage.
• Not aligning disability coverage with succession, estate, or retirement strategies.
• Failing to update policies as the business grows or changes.

Neglecting to revisit coverage periodically can result in benefit levels that no longer match current expenses, leaving gaps during a critical time.

How Disability Insurance May Fit into a Broader Financial Plan

Disability coverage can be one component of a larger financial and business protection strategy.

It May Intersect With:

• Retirement planning – May help avoid depleting retirement savings during a disability.
• Succession planning – Could fund planned transitions in leadership or ownership.
• Estate planning – Might help maintain the value of the business for heirs.
• Risk management – May complement life, liability, and property coverage.

By integrating disability insurance with other planning tools, business owners can take a more comprehensive approach to risk management and continuity.

Disability Insurance for Business Owners: FAQs

What’s the difference between BOE and individual disability insurance?

BOE may help cover business expenses, while individual disability insurance can help replace personal income.

Can I deduct disability insurance premiums?

BOE premiums may be deductible, though benefits could be taxable. Individual policy premiums are typically not deductible, but benefits are often tax-free. We do not provide tax advice. It’s essential to consult a tax professional.

What happens if I sell or close my business?

Some policies may be continued; others may end. It’s advisable to review with the carrier before making changes.

How much coverage should I consider?

The amount may depend on your business expenses, personal income needs, and how long you might need coverage to sustain operations.

Can disability coverage be customized?

Yes, many policies may be tailored with riders, benefit periods, and elimination periods to suit your situation.

We May Be Able to Help with Business Disability Insurance Planning

At Capital Formation Group, we can work with business owners to design disability coverage that supports both personal income and business operations.

This May Include:

• Reviewing existing policies.
• Identifying potential gaps or overlaps.
• Aligning benefits with overall financial strategies.
• Coordinating with other planning efforts.

Contact Us or Schedule a Meeting

You can schedule an appointment online or call/text us at (781) 237-0123. A customized review may help you feel more confident that your business and your income are protected against life’s uncertainties.

Required Disclosures:
The material is for informational purposes only and is not intended to provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation, or needs of individual investors. This information is not intended for use as legal or tax advice. Persons should consult with their own legal or tax advisors for specific legal or tax advice. Guarantees are based on the claims-paying ability of the carrier offering the guarantee.

This blog was created with the assistance of ChatGPT. The content has been reviewed and curated to ensure accuracy and relevance.

Securities offered through Valmark Securities, Inc., Member FINRA, SIPC. Investment advisory services offered through Valmark Advisers, Inc., an SEC-registered investment advisor. 130 Springside Dr., Suite 300 Akron, Ohio 44333-2431 • 1-800-765-5201.

Capital Formation Insurance Agency, Inc. and Capital Formation Group, Inc. are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc. Diversification cannot assure a profit or guarantee against a loss.