Do Businesses Need Corporate Disability Insurance?

Assume the Risk or Pay the Premium

Most companies can justify the cost of key person insurance to fund their buy-sell agreement. However, most business owners look at disability protection with the same interest as whether to add whip cream to their mocha.

Is this the correct mentality? Maybe. Let's evaluate the choices a company should consider and answer the age old question, "Should We Mitigate Disability Risk or Not?"

Cold Hard Facts

At age 40, your chances of becoming disabled for 90 days or longer prior to age 65 is 43 percent (2004 Field Guide, National Underwriter).

The average long-term disability claim duration is 31.2 months. (2010 Genre Disability Fact Book, 6th addition).

One in seven workers will be disabled for more than five years (American Council of Life Insurers).

The majority of long-term absences are actually due to illnesses, such as cancer and heart disease.

The number of major insurance carriers offering executive disability has shrunk to a hand full, as the risk is great and profitability lower than other insurance coverages.

The typical disability plan covers approx 60 percent of the executive's income, bonuses excluded. We recently placed a policy for two business owners at 74-75 percent with a major "A" rated insurer.

Most plans have lots of flexible variables that allow for a policy to be tailored to corporate needs and budget, such as elimination period, benefit period and total monthly benefit. There are other riders and important additions to consider, such as cost of living or residual (partial) disability coverage.

Disability Premiums for women are generally more than those in an equivalent male policy. This is the opposite of life insurance.

Health Screening for Disability Insurance is Stringent

In our experience, at least half of disability insurance applicants are denied. If you have hard to insure (i.e. poor health) or older executives, consider adding other key executives to your benefit package. Several carriers have guaranteed issue if a minimum number of polices are secured. This will allow for true group health rating, minimal underwriting, and will allow coverage for those who may not qualify otherwise. Recently, my firm was able to address a client's disability needs who had two uninsurable key executives who were near retirement. By adding a fifth employee to the group, they were able to provide important disability coverage for the two most important key employees, who would not been able to get this protection.

An experienced corporate insurance advisor will understand how an insurer thinks, and more importantly, will be able to solve the client needs.

Considerations-Does the Risk Outweigh the Cost?

The first thing a company should consider is the financial impact the loss of a key executive would have on corporate revenue. If the loss of income is significant, insuring this important player should be strongly considered. If an employee plays such an important role in the company that a substantial loss of productivity would occur (i.e. a co-founder or partner), then the disability premium can be justified. We work with a lot of Silicon Valley startups, who have irreplaceable CTOs. As an owner, ask yourself, could I easily replace this individual within a few months? If the answer is no, then the answer is obvious.

If other management can take on the added responsibility of the incapacitated executive for 6 months or more, then disability insurance can probably be forgone.

Corporate Disability protection is often utilized for C-level Sales Managers who travel considerably.

Companies with two or three owners, with a buy-sell agreement in place and where each partner plays a distinct and integral role, should strongly consider this added insurance expense.

Do you have any employees who are engaged in any projects which, if left unfinished, would prove costly to your company? How costly?

It comes less down to whether the cost can be justified for executive disability insurance. Instead it boils down to whether the company can absorb the loss of income if that key employee can no longer produce.

Where else would this type of insurance apply? We welcome your comments.