Double Protection for Your Business
You've worked hard to build up your business. You’ve poured your blood, sweat, tears into it. It's taken years, but you've finally got it to a point where it's highly profitable. and you should be very proud of yourself. And nothing will ever happen to you that will take you away from your business, right? Everybody thinks that way. But statistically, one in four people will become disabled during their working years. You need to protect yourself from this potential disaster.
That’s why we should talk about protecting your most valuable business asset: your future earning potential. Many small business owners have all their eggs in one basket. This can lead to potential catastrophic economic chain of events. What would happen to your business if you were out of the office for 6-9 months? How would that affect your individual household? How would you survive?
Part One of Our Two-Prong Strategy: Disability Insurance
Kaiser Tax has a two-prong strategy for small business owners to help protect what they've worked so hard to build up. Let's start on the personal side - disability insurance. Disability insurance is something every small business owner needs. It's designed to replace your after-tax income—typically 60 percent of your gross monthly income.
You pay these premiums personally and there's no tax deduction, but that's okay. While there’s no tax deduction for the premium you pay, the benefits you collect if you become disabled are non-taxable. This way, the policy is working the way it should. The benefits will not be taxable and will replace your after-tax income.
For example, let's say your gross monthly income is $10,000 and your disability benefit is $6,000. If you become disabled, you're going to need that $6,000 to pay your bills. You don't want that $6,000 to be taxable because it would mean you’d only have $4,000 to pay your bills; you won't be able to survive.
It’s true that personal disability insurance is expensive. Insurance companies may be on the hook for benefits payments over many years. For example, if you become disabled at age 38 and cannot return to work, the insurance company would pay a benefit from your current age to age 65. The insurance company has quite a lot of exposure, and the premium you pay will be reflective of that exposure.
One thing to consider is whether your business can have a group disability insurance policy. Typically, group disability is much more affordable. Going this route, you still want to pay for your disability policy post-tax so the benefit is tax-free. The company could pay some or all of the premium, providing a tax-free benefit to employees. However, if a company pays all or a portion of the premium, then all or a portion of the benefits, if ever collected, would be taxable. So, there's a trade-off there.
Part Two of Our Two-Prong Strategy: Business Overhead Insurance
But what about your business? What would happen if you were out for that 6-9 months? Can your business survive without you? If it can’t, what happens to your household income?
Part two of our two-prong approach is for business owners to purchase business overhead insurance. Think of it as disability insurance for your business. The business is the owner of the policy, and it pays for the policy. And here's the really good news: it's affordable and tax-deductible as an ordinary and necessary business expense.
So how does this policy work? If you become disabled, the insurance company will pay for the operating expenses of your business, such as rent, phone, utilities, payroll for your employees, and other costs. But it won't cover your salary or any salary of any of your family members. That's why you need your personal disability policy.
Savvy business owners would also be wise to have business overhead insurance on key income-producing employees, such as a top sales person, top attorney, or high-income producing chiropractor or dentist. Any employee who's critical to your business's success would be a candidate for you to purchase business overhead insurance for. If they become disabled, it won’t cripple your business.
It's very important for you to protect your most important asset: your future earning potential. This is critical for small business owners in particular. You need the two-prong attack: a disability policy to protect your personal household income and business overhead expense insurance to protect the business.
Full discloser, Kaiser Tax in not an insurance agency and does not sell or receive any remuneration from insurance products. It is simply our goal to give small business owners the best practical advice. To learn more about our two-prong approach, contact Kaiser Tax today.