Business Loan Disability Insurance
Disability can be disastrous for business owners – purchasing disability insurance is a key risk management tactic. For those with bank loans, business loan disability insurance can help by covering bank loan payments during a period of disability.
Small business owners work hard to fulfill their dreams. They also fuel the U.S. economy: the U.S. Small Business Administration (SBA) says there are over 33 million small businesses in the U.S., but only 20,868 large businesses. Small businesses created 17.3 million net new jobs between 1995 and 2021, whereas large businesses only created 10.3 million.
Many people pursue small business ownership, but building a successful business isn’t easy or cheap. Small business owners often need to take out business loans. According to the Federal Reserve, 9% of small businesses had at least $1 million in debt at the end of 2022 and many more had smaller, but still significant, amounts of debt.
When business owners take out loans, they typically expect to be able to repay the debt through their hard work. A disability can upend those plans by making it impossible to keep up with the required monthly payments.
Business Loan Disability Insurance
Disability can be disastrous for business owners – purchasing disability insurance is a key risk management tactic. For those with bank loans, business loan disability insurance can help by covering bank loan payments during a period of disability.
Small business owners work hard to fulfill their dreams. They also fuel the U.S. economy: the U.S. Small Business Administration (SBA) says there are 31.7 million small businesses in the U.S. but only 20,139 large businesses. Small businesses created 10.5 million net new jobs between 2000 and 2019, whereas large businesses only created 5.6 million.
Many people pursue small business ownership, but building a successful business isn’t easy or cheap. Small business owners often need to take out business loans. According to the Federal Reserve, 9% of small businesses had at least $1 million in debt at the end of 2022 and many more had smaller, but still significant, amounts of debt.
When business owners take out loans, they typically expect to be able to repay the debt through their hard work. A disability can upend those plans by making it impossible to keep up with the required monthly payments.
Taking Out Business Loans? Disability Insurance Can Be Essential
Imagine a woman named Emily opens a small, one-person company providing baked goods to local restaurants and coffee shops. Her reputation grows and she can no longer meet demand. It’s time for her to expand her business. She wants to open a small bakery at a location with a lot of foot traffic and plans to hire an assistant or two. As this will require some capital, she applies for a bank loan. Once she has received approval for the loan, she secures the commercial property, buys some new kitchen equipment, and hires two employees. Everything is falling into place.
Then Emily experiences debilitating back pain.
She’s diagnosed with degenerative disc disease. Although she hopes her condition will improve with treatment, she’s in a lot of pain and can’t stand for prolonged periods of time or do the physical work involved in professional baking. The assistants she’s hired try to help, but they don’t have the baking skills required to take over. The fact is Emily’s bakery can’t operate without Emily. She has to cancel orders, which means she doesn’t have any revenue. She doesn’t know how she’ll cover her monthly loan payments.
This type of situation is exactly why business loan disability insurance exists. Also called bank loan disability insurance or business loan protection, it can cover business loans during a period of disability. If Emily had coverage, she wouldn’t have to worry about her bank loan payments. Instead of focusing on her loan obligation, she could focus on healing.
Some banks require business loan disability insurance as a condition of taking out a loan. Even if the bank doesn’t require coverage, it’s a good idea. The Social Security Administration says one in four of today’s 20-year-olds will experience a disability before turning 67. Businesses fail for many reasons, but with business loan disability insurance, mounting business debt during a period of disability doesn’t have to be one of those reasons.
Business Overhead Expense vs. Business Loan Disability Insurance
Both business overhead expense insurance and bank loan disability insurance provide important disability protection for small business owners. It is sometimes possible to purchase a business loan protection rider that adds business loan indemnification to a business overhead expense policy. However, there are key differences between these two protections – and business overhead expense insurance may not provide adequate coverage on its own.
Business overhead expense (BOE) insurance is a type of disability insurance policy designed to cover business expenses, such as rent, utilities, property taxes, employee salaries, accounting fees, and office equipment expenses. Although BOE covers many common overhead expenses, it may not cover bank loans. This is one reason why small business owners with bank loans need business loan disability insurance on top of their BOE coverage.
Another key difference involves the benefit period. BOE coverage typically has a benefit period of 12 to 24 months. This gives the business owner a year or two to either recover and return to work or to make other arrangements for the business. For example, if the business owner is unable to return to the business full time, he or she might decide to take on a business partner. However, the benefit period may not be sufficient for bank loans, which may have a repayment period longer than one to two years. Bank loan disability insurance can provide a benefit period that covers the full period of financial obligation. This is another reason to consider coverage.
Individual Disability Insurance for Business Owners
Business overhead expense insurance and business loan disability insurance provide financial protection for the business in the case the owner experiences an illness or injury. But what about the business owner’s personal income?
Although some business owners pay themselves a regular salary, many take an “owner’s draw.” This means small business owners draw money from the company’s profits. This can be a great way to obtain a flexible income as the business prospers, but if the business isn’t making a profit – for example, because the owner is experiencing a disabling illness or injury – there’s no money to take.
Business owners need to protect both their company’s finances and their personal finances. Individual disability insurance provides this protection. If the policyholder is unable to work due to a covered disability, individual disability insurance replaces a portion of the individual’s regular income. The policyholder can use this money to cover housing costs, utilities, groceries, medical bills, and other expenses.
Other Disability Insurance Products for Small Business Owners
In addition to business overhead expense insurance, business loan disability insurance, and individual disability insurance, some small business owners may be interested in additional disability insurance products.
- Key person disability insurance provides a payment to the company if a covered employee is unable to work due to a disability.
- Buy–sell disability insurance provides a payment to fund a buy–sell disability agreement if one partner needs to leave the business due to a disability.
- Multi-life disability insurance can provide a discount and guaranteed standard issue disability insurance can provide simplified underwriting when multiple people at a company purchase disability insurance.
Are You a Business Owner?
Protect your business from the consequences of disability. An insurance agent can help you compare disability insurance options from top disability insurance companies. Find an agent.
Are You an Insurance Agent?
Small business owners may not know about the disability insurance products available to them, including business loan disability insurance. You can help by educating business owners and showing them what’s available. Get a quote.
The following resources can help insurance agents explain business loan disability insurance.
