Business-owned disability insurance
Insurance your business owns, so it can keep running if an owner or key person can’t work because of an illness or injury.
- Bills paid while you recover
- rent, staff and overhead keep running
- Time to adjust
- if a key person can’t work
- A fair exit if it’s long-term
- funds a buy-out of the owner’s shares
Business-owned disability insurance
If an owner or key person can’t work.
Three types of coverage respond at different times after the same disability. Together they keep the business running, then fund a fair exit if the disability is long-term. A disability isn’t always an injury: illnesses, chronic pain and mental health conditions can also keep someone from working.
After a short waiting period, overhead expense insurance pays the business’s monthly bills and key person disability insurance pays the business while the person is away, each for a set period. If the disability lasts as long as the buy-sell agreement sets, often one or two years, buy-sell disability insurance funds the purchase of the owner’s shares.
The first two keep the business running while the person recovers. If they can’t return, the buy-out lets the other owners carry on and pays the disabled owner fair value.
Illustration only, not to scale. Waiting periods and benefit periods are set in each policy, and the buy-out timing is set in your buy-sell agreement.
Types
Three types of coverage.
Each one does a different job. Many businesses with more than one owner use two or all three.
| Feature | Overhead expense | Key person disability | Buy-sell disability |
|---|---|---|---|
| Protects | The business’s day-to-day costs while an owner recovers | The business’s revenue while a key person is away | The owners, by funding a buy-out |
| Who’s insured | An owner whose work keeps the business running | An owner or employee the business relies on | Each owner |
| What it pays for | Eligible monthly expenses such as rent, utilities, staff wages and leases, but not the owner’s own pay | Lost revenue and extra costs, and in some plans the cost of recruiting a replacement | The disabled owner’s shares |
| How it’s paid | Monthly, as expenses are reimbursed, for a set period | Monthly, for a set period | As a lump sum, in instalments, or both, depending on the plan and your agreement |
| When it starts | After a short waiting period | After a waiting period | After the disability period in your agreement |
| How it’s taxed | Premiums generally deductible, and benefits taxable to the business | Premiums generally not deductible, and benefits generally tax-free | Premiums generally not deductible, and benefits generally tax-free |
| More about each type | Business overhead expense | Key person insurance | Buy-sell insurance |
Overhead expense
- Protects
- The business’s day-to-day costs while an owner recovers
- Who’s insured
- An owner whose work keeps the business running
- What it pays for
- Eligible monthly expenses such as rent, utilities, staff wages and leases, but not the owner’s own pay
- How it’s paid
- Monthly, as expenses are reimbursed, for a set period
- When it starts
- After a short waiting period
- How it’s taxed
- Premiums generally deductible, and benefits taxable to the business
Key person disability
- Protects
- The business’s revenue while a key person is away
- Who’s insured
- An owner or employee the business relies on
- What it pays for
- Lost revenue and extra costs, and in some plans the cost of recruiting a replacement
- How it’s paid
- Monthly, for a set period
- When it starts
- After a waiting period
- How it’s taxed
- Premiums generally not deductible, and benefits generally tax-free
Buy-sell disability
- Protects
- The owners, by funding a buy-out
- Who’s insured
- Each owner
- What it pays for
- The disabled owner’s shares
- How it’s paid
- As a lump sum, in instalments, or both, depending on the plan and your agreement
- When it starts
- After the disability period in your agreement
- How it’s taxed
- Premiums generally not deductible, and benefits generally tax-free
Critical illness insurance
Disability coverage pays when someone can’t work. Critical illness insurance pays a lump sum on diagnosis of a covered condition, whether or not they can work. Some businesses add it to top up a buy-out when enough disability coverage isn’t available.
Tax treatment is a general guide. Get tax advice for your situation.
Claims
How a claim works.
Each coverage has its own claim, but the steps are much the same.
Let us know
Tell us as soon as an owner or key person can’t work. We’ll help you start the claim with the insurer.
Send proof
The insurer asks for medical proof of the disability and, for overhead expense, proof of the business’s expenses.
The waiting period
Benefits start once the waiting period in the policy, or the disability period in your agreement, is met.
Benefits are paid
Payments continue until the benefit period ends or the person returns to work. For a buy-out, until the purchase is funded.
How much
What sets the amount.
Each coverage is sized to the job it does. These are the questions we work through with you.
Overhead expense
Your regular monthly business expenses, such as rent, staff wages and leases.
Key person disability
What the business would lose while they’re away, and what it would cost to cover their work.
Buy-sell disability
The value of each owner’s shares under your buy-sell agreement.
Insurers limit each benefit to an amount the business can show it would need.
Cost
What affects the cost.
Age
Rates rise with the insured person’s age.
Sex
Rates differ for men and women.
Health history
Their answers to the health questions.
Occupation
The kind of work they do, and its risk.
Coverage amount
The larger the benefit, the higher the premium.
Waiting and benefit periods
A shorter wait or a longer benefit period costs more.
Premiums that can’t be raised
Many business disability plans are non-cancellable. As long as premiums are paid on time, the insurer can’t cancel the policy or raise its premium, up to an age set in the policy.
Is it right for your business?
Who it suits.
May suit you if
- Your business depends on you, or on one or two people, to keep running.
- You have rent, staff or leases to pay whether or not you can work.
- You have partners, and a buy-sell agreement or plans for one.
Something else may fit better if
- You want to replace your own income if you can’t work.Disability insurance
- You want to protect the business if an owner dies.Business-owned life insurance
Frequently asked questions
All questionsWho is eligible for business-owned disability insurance?
Business owners, partners and key employees whose absence would significantly affect the business. A disability isn’t always an injury: illnesses, chronic pain and mental health conditions can also keep someone from working. Each insurer sets its own eligibility rules, and we’ll check them with you.
How does business-owned disability insurance impact tax obligations?
It depends on the type. For overhead expense insurance, premiums are generally tax-deductible and the benefits are taxable to the business. For key person disability and buy-sell disability insurance, premiums generally aren’t tax-deductible, and the benefits are generally received tax-free when the premiums aren’t deducted. Get tax advice for your situation.
What are the cost factors for business-owned disability insurance?
The insured person’s age, sex, health history and occupation, the coverage amount, and the waiting and benefit periods you choose. A shorter wait or a longer benefit period costs more.
Can business-owned disability insurance be customized?
Yes. You choose the type of coverage, the benefit amount, the waiting period and the benefit period, within what the insurer offers and what the business can show it needs. We help you set them to fit the business.
What is the process for claiming benefits under business-owned disability insurance?
Tell us as soon as an owner or key person can’t work, and we’ll help you start the claim with the insurer. The insurer asks for proof of the disability, and benefits start once the waiting period is met. Each step is set out in How a claim works.
Related articles
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- Employee group benefits6 minute readNavigating your return to work after long-term disability: a guide to successDiscover essential tips for a smooth and successful return to work after long-term disability, ensuring a confident transition back to your routine.
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Related to business-owned disability insurance
- Business overhead expense Covers business expenses if you can’t work after an illness or injury.
- Key person insurance Protects your business if you lose someone vital to it.
- Buy-sell insurance Funds a buy-sell agreement if an owner becomes disabled or dies.
- Business-owned life insurance Life insurance owned by your company, for protection and planning.
A question about your coverage? Ask us.
No obligation. We’ll tell you plainly what we think, including when you already have what you need.