*As published in the Spring 2013 issue of FinanceWorks.ca

You are an entrepreneur. You’re working every day to improve and grow your business. Whether it’s because of your skills in sales, manufacturing or trade, the success of your business relies on you. So what happens if you are unable to work? How long does your business keep running without you at the helm? And if your business stops running, how long can you keep afloat without the income your business provides?

Disability insurance is the key to protecting you and your business. There are two types available for the self-employed small business owner: disability insurance on your income and overhead insurance for your business expenses. 

Here is an example of how the two types of disability insurance work to provide you and your business the protection needed to ensure survival of both during the period when you are unable to work.


Susanne is a 37-year-old owner of a small flower shop.  Susanne does it all: she creates the arrangements, she sells in the store, she does the bookkeeping and she cleans and maintains the storefront. One day, Susanne slips coming down the stairs at her home and breaks both her right leg and her right arm. Suddenly, she isn’t able to perform the duties of her job and she has to close the flower shop while she recovers. Luckily, Susanne has disability and overhead insurance in place.

  • Her shop was bringing in an average revenue over the last six months of $8,000. She has disability accident insurance coverage for $3000 per month to protect her household expenses. Her policy has a zero day waiting period so she files the claim and it begins to pay her the $3000 per month.
  • Her shop has fixed expenses that have to be paid regardless of whether the shop is open or not: rent, phone, utilities, and business insurance. These expenses are $2000 per month and she has overhead insurance coverage for this amount. So her overhead policy begins paying the $2000 per month so she can pay those fixed monthly expenses.

Susanne is unable to work for three months during her recovery. The insurance company pays her, between the two types of disability insurance, $15,000. That money keeps Susanne from having to go into debt or dip into her RRSP to make it through the period of disability.

Even if you are a business owner providing a service without any overhead, having disability insurance in place allows you to make it through a period where you are unable to generate any income. If you cannot work, your income stops and it puts undue stress on you as the financial obligations mount. Even once you are able to work again, it may take a while to get your income back up to level it was at before the disability. Without any coverage, you accumulate debt or drain your savings or deplete your RRSP or all three.


Example

  • A 35-year-old, non-smoking male civil engineer on contract
  • Annual income is $75,000. Doesn’t have any group benefits
  • One week’s income is $1442.31

He can get a $3800 per month disability insurance policy that covers him if he’s off work for an accident or sickness. The benefits start after 30 days and will continue up until age 65, if he continues not to be able to work in his regular occupation.  The cost is $1395.12 – less than one week’s income to protect his lifestyle.


Many self-employed individuals shy away from disability insurance because the premiums are higher than for life or critical illness insurance per $1000 of coverage. However, the reason for this is that you are more likely to claim on a disability insurance policy than on the other two.

There are many different disability insurance coverage options and a broker can work with you to find something that is affordable and maintains your lifestyle if you were no longer able to generate income.

The number one reason that people default on their mortgage is because they are unable to work due to an accident or sickness.

Regardless of how you make your income, it’s your ability to work that provides you with the lifestyle you enjoy. All your expenses, including your house and your car, depend on this income flow. When you can’t work, everything else is hanging in the balance. Disability insurance is the cornerstone of any self-employed individual's financial plan.