If anyone reading that title has ever sat down with me for a new client interview, you probably know exactly what I’m referring to. The rest of you have probably been left a bit confused and scratching your heads. We’ll clear that up. Stick with me if you haven’t already figured it out.  Well…stick with me anyway. 

For a great many employees, working full time in professional environments, disability income insurance (also known as Long Term Disability) is almost always an afterthought. It’s something likely provided by the employer and almost never works the way or covers the amount of income the employee (or even the business owner) thinks it does. For the small business owner, however, the possible implications of a poorly designed disability plan could be far more dire. So, I’m going to dedicate this month’s article to the independent professional. 

Let’s say we have a professional firm of one hundred employees and our business owner has a stroke or is diagnosed with cancer. (It sounds awful, but it happens every single day many times over in this country.) Technically, this would still be what industry would consider a “small business”, but the impact of that owner being removed from the day-to-day of the business could likely be far more easily compensated for than the same thing happening to an owner of a professional firm with 10, or even 3 employees. Hopefully, each of these owners has his/her personal disability issues well covered, but there’s probably a significant difference in future business impact. 

Let’s take a small law office of one or two attorneys and a couple legal secretaries as a sampling. You can also just as easily substitute “CPA” for “attorney” and “staff accountant” for “legal secretary”. Now, apply our cancer or stroke scenario. The business owner has a disability policy that was bought 10 years ago and has never revisited it. The benefit is less than adequate, replacing only 40% of his current income that has gone up substantially since he first bought the policy. Not only does his family suffer the financial effects of his disability and loss of income, but his firm (which relies heavily on his daily professional involvement), can no longer attract new business nearly as efficiently and is having trouble retaining what it already has. 

Not clear enough yet? Ask an independent CPA what would happen to his practice if he got diagnosed with a serious illness in November and probably wouldn’t be able to return to a normal work schedule for eight months.  Let me save you the trouble. Disaster. Not only would the business lose tremendous income during that time, but the financial recovery could take years. Why? Because those clients had to go somewhere, and many of them may not come back. 

Covering the office and payroll is equally important because if the rainmaker dries up because of a disability, you can bet the business cash flow will too. Having a Business Overhead Expense disability policy is a comparably cheap and simple way to deal with this huge problem.  After all, who wants to recover after a year or more of treatment and return to work having to rebuild from scratch thanks to losing the office lease, equipment, and probably some key staff? 

Any independent professional who does not have an adequate disability plan for both themselves personally, and another that covers their office and operations runs the very real and serious risk of suffering a long term financial disability that could extend well beyond the medical one – it’s a business killer for certain. 

So we finally come to the issue of the tax return. What’s this got to do with everything? Simple. Disability insurance companies perform financial underwriting as well as medical. You can apply anytime of year you wish, but the BEST time is right now when those tax returns are hot off the press for 2009. This is the primary source of data used when trying to place a policy on a business owner or partner in a firm. It’s also what is primarily used to determine business expenses for overhead expense policies. 

Have your tax preparer make an extra copy and get those K1s, 1065s, Schedule Cs, etc… and sit down with an insurance professional who is very well versed in disability insurance. It may well one day save your business and your family.