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Business Owners and Disability Risk

Business owners have long been a different breed when being compared to their employees. A business owner generally takes more risk, works harder and has more stress than the average worker. It’s something in the business owners DNA that makes them unique. If we were all like that, we would all own our own company and there would be no more workers, so we need a balance. Yet business owners still face the risk of disability. In fact, the chance of suffering a disability for 90 days or longer in Canada is about 50%. Furthermore if the disability last longer than 90 days, a business owner is likely to be out of work for between 2-3 years. It’s hard enough to find time to take a 2 week vacation, so imagine what the business will look like after a disability. 

A great business owner can look at the big sky ideas and the minor problems all at once; it has been said that a great business owner can look through a telescope and a microscope at the same time. The problem is that most of us are good at one or the other; but not both. This is why we often don’t deal with things like proper disability coverage and the protection of business and income, in the case of what we think is a long shot. People will often think in terms of this the old adage: “Other people get disabled, not me”. Or, “I will take the risk.”

Then there is the 26% solution.  The business owner puts a long term disability package in place to cover all employees, including him/herself. The definitions are the same for everyone and the coverage limits are set. It’s often done this way because in the beginning, the owners aren’t really making much more that the employees because the company is young and the owner is tossing profit back into the company. Owners often think if they become disabled, they would still go to work to run the company on good days. Owners also think they can supplement their income with “extra cash flow” from the company. Then it happens, the owner suffers a heart attack and becomes disabled from the job. It happens all the time. But when it does, the business owner is working harder than ever; cash flow is eaten by a recent expansion and the owner’s income has been paid with dividends to take advantage of tax treatment.

Now a claim goes through and a problem arises. The definition is not the problem, it’s the income. The owner thought he was making $100,000 per year; but not on paper according to Revenue Canada. The owner told the insurance company that his income was $100,000 but in reality $30,000 was paid to his spouse for income splitting, out of the $70,000 remaining, $40,000 was salary and $30,000 was paid in dividends which are not covered for disability insurance by most companies.  So at the end of the day, the business owner received disability coverage based on the formula of 67% of $40,000 therefore $26,800.

The solution would have been to either buy full coverage based on the $100,000 income from a private carrier, or to calculate correctly the amount of coverage to be paid from the group, and “top up” the difference through a private plan. The exposure for underinsurance is not worth the risk of family or income loss.

The recommendation is to talk to an insurance professional with Disability insurance experience.

If you are in Nova Scotia and would like some insurance advice, please contact Corry Collins:
corry@maritimewealth.com
902-444-7000

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