Disability Income Insurance

Disability Income Insurance

Tom Fischer

Disabilities that affect someone’s ability to work can be a serious issue for businesses and organizations of all sizes. Whether you’re a business owner or a benefits manager, disability income (DI) insurance can help replace a portion of your employees' income if they become too ill or injured to work. Businesses can use DI as an effective planning tool to mitigate risk. Offering DI can also help you to recruit and retain employees.


Features and benefits

Income Protection for Employees

If you offer group long-term disability benefits, the coverage may only protect about half of an employee’s net monthly income. You can help your employees reduce the coverage gap by making supplemental individual DI insurance policies available to them. This supplemental individual disability income insurance does not coordinate with your group long term disability coverage and claim decisions are rendered independent of each other. By offering this valuable coverage as a voluntary benefit, your employees can have added protection to help them meet their financial obligations during a disability, at little or no cost to the business. Depending on your company’s needs, a DI offering can be either voluntary or employer-paid and might be eligible for simplified underwriting. Regardless of the design, your employees enjoy discounted premiums and policy portability.


Retirement Protection for Employees

Your employees have worked hard to save for retirement, and you can offer a way to help them protect the nest eggs they have built. A major derailer for many people approaching retirement can occur if they become too sick or hurt to work and are forced to tap into their retirement savings to meet the expenses of everyday life. A disability income policy can not only replace a portion of one’s income when a disability occurs, but it can also be designed to help your employees continue saving for retirement if they become too sick or hurt to work. In this way, offering DI policies can help your business attract talent and build loyalty.


Protect Your Business and Select Employees

For a small business, a key employee’s disability can impact the company’s bottom line. However, if you choose to continue paying that employee’s salary without having a pre-existing plan in place, tax reporting issues may arise as the Internal Revenue Service (IRS) would generally not recognize those payments as a business expense. A Qualified Sick Pay Plan (QSPP), which is recognized by the IRS and can be funded with DI, sets company policy before a disability occurs. Funding a QSPP with DI, you transfer the risk of a portion of that employee’s salary to the insurance carrier. The owner can choose which employees will be included in a QSPP, making it ideal for family businesses looking to offer disability income protection for non-owner family members.


Fund Buy-Sell Agreement

If your business has multiple owners, you can use DI to fund a buy-out option if one partner becomes disabled, allowing for an orderly transition of ownership. Additionally, this allows the insurance carrier to serve as an objective third party to determine whether a disability has occurred. If you’re in a partnership that has an existing buy-sell agreement, it’s important that you review the agreement to ensure that disabilities are addressed and funded.


Cover Business Overhead Expenses

As a business owner, you have expenses to pay and obligations to meet. So, if you were to become disabled, the future of your company could be in jeopardy. However, with a business overhead expense (BOE) disability policy in place, the business can continue to operate even while you are unable to work. A BOE policy can help by paying a portion of overhead expenses, such as leases and salaries, in the event of a business owner’s disability. Premiums for a BOE policy are generally tax deductible and the benefits paid, which are subject to taxation, are used to pay for expenses that are commonly tax deductible.


What is the process for getting a disability income insurance policy?

When you work with a financial professional, what can you expect?

During your initial phone call, your financial professional will ask you questions to understand your financial goals and objectives.

After looking at your entire financial picture, your financial professional will provide you with suggestions to fill in the gaps so you can choose the products best suited for your situation. Note that there may be implications under the Employment Retirement Income Security Act ("ERISA") depending on how disability income insurance policies are made available to the employees and whether such an arrangement constitutes an "employee benefit plan" under ERISA. Employers should consult their own tax and legal advisors for further information on potential ERISA implications.

If you're satisfied with their recommendations, your financial professional will work with you to secure the products and services to help ensure your financial future. A medical exam may be required to qualify for DI plans.


Your financial professional can work with you over time through periodic reviews to help you monitor the strategies that have been put in place, and ensure your goals are met.

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Tom Fischer

Tom Fischer is a Financial Advisor with MassMutual. Tom and his team are located in Madison, Wi, and they specialize in financial planning for Businesses. Tom is an experienced advisor, who enjoys building relationships with his clients and meeting their various small business needs.

Email: tfischer@financialguide.com
Phone: 608-829-0015