Short-Term Disability Insurance for Small Business Owners : Risk Management Essentials

Disability insurance replaces your income when injury or illness prevents you from operating your small business.

This financial safety net allows you to cover essential expenses like rent or mortgage, childcare, and groceries while you cannot work.

A poster on Short-Term Disability Insurance for Small Business Owners | Graphic done by Michael Ndenga.
Short-Term Disability Insurance for Small Business Owners | Graphic done by Michael Ndenga.

It’s important to note that disability insurance typically covers most injuries and illnesses, such as chronic pain, limb loss, broken bones, complications from pregnancy or childbirth, and even conditions like cancer. However, it usually doesn’t cover disabilities stemming from pre-existing conditions.

The type of disability benefits you receive hinges on whether you opt for short-term or long-term coverage. Short-term disability insurance provides support for a few months, typically three to six, while long-term disability insurance extends coverage for a year or more, sometimes until retirement age.

What are the main types of disability insurance?

Short-term disability insurance

Typically covers you for three to six months if you’re unable to work due to illness or injury.

There’s usually a short waiting period of 14 days or less before you start receiving benefits.

The benefit amount can be up to 80% of your gross monthly earnings.

This type of coverage is often provided by employers or can be bought independently. Some states require it.

READ MORE: Short-Term Disability in MN: Eligibility, Benefits, and Process

Long-term disability insurance

Offers coverage for a longer period, ranging from two years, five years, 10 years, or until retirement, depending on the policy.

The waiting period, known as the elimination period, is usually between 30 to 720 days, with 90 days being common.

Benefits can be up to 60% of your gross monthly earnings.

It’s typically provided by employers or purchased directly from an insurer.

READ MORE: How Much Does Long-Term Disability Insurance Cost?

Social Security disability insurance

Provides benefits for as long as your disability lasts.

There’s a six-month waiting period before benefits start, and the amount is based on your average lifetime earnings.

This coverage is available to U.S. citizens who’ve contributed to Social Security.

READ MORE: SSDI 101:Social Security Disability Insurance in 2023

Do small business owners need to offer disability insurance?

In general, small businesses are not mandated by the government to provide disability insurance.

However, you must offer short-term disability insurance to your employees if your business operates in:

  • California
  • Hawaii
  • New Jersey
  • New York
  • Rhode Island

Moreover, most states require businesses with employees to have workers’ compensation insurance, which covers disabilities resulting from work-related injuries or illnesses.

The specifics of workers’ compensation requirements vary depending on the state in which your business operates.

What kind of disability insurance do small-business owners need?

Small-business owners should consider own-occupation long-term disability insurance as it’s the most suitable option.

This insurance provides income replacement if you become unable to run your business due to a disability, even if you can still work in a different role.

Additionally, it’s wise to think about partial disability insurance, which covers you when your disability hampers your usual business activities, even if you’re not entirely disabled.

It’s crucial for small-business owners to protect their income and livelihood in case of unexpected events like disabilities.

READ MORE: Own Occupation Disability Insurance: The Secret Weapon of Successful Professionals

Disability insurance riders for small-business owners


Small business owners should consider valuable disability insurance add-ons, known as riders, to safeguard their income. These riders include:

  1. Cost of Living Adjustment (COLA): Boosts your monthly benefit to counteract inflation.
  2. Future Increase Rider: Allows you to enhance coverage as your income rises, without undergoing another medical evaluation.
  3. Non-cancelable/Guaranteed Premiums: Ensures policy continuity and stable rates as long as payments are made punctually.
  4. Retirement Protection: Substitutes the retirement savings you would have accrued during your working years.
  5. Student Loan Rider: Assists in servicing student loans during periods of inability to work.


Other pertinent considerations for small-business owners regarding disability insurance may involve tailored coverage for business expenses, overhead expenses, and buy-sell agreements to safeguard against financial disruptions caused by disability.

Disability insurance vs. business overhead expense insurance

business overhead expense insurance and disability insurance serve different purposes for small-business owners.

Disability insurance covers personal expenses in case you’re unable to work due to illness or injury, while business overhead expense insurance (BOE) covers your business’s operational costs for up to one to two years if you’re unable to work. This includes:

  • rent
  • utilities
  • salaries
  • taxes,
  • other essential expenses.

Combining BOE with long-term disability insurance from the same provider can often result in cost savings.


Additionally, it’s important to note that both disability insurance and BOE insurance are crucial for protecting small businesses from financial strain in the event of unexpected events like illness or injury to the owner.

It’s wise for business owners to carefully consider their insurance needs and options to ensure comprehensive coverage.

When should small-business owners get disability insurance?

For small-business owners, it’s best to secure disability insurance before launching your venture.

This ensures smoother access, as it can take time to establish income and provide necessary documentation.

However, if you’ve already started your business, you can still obtain coverage, albeit with potential delays.

Disability insurers might require contract agreements instead of tax records to project future earnings.

Additionally, if your business operates in lucrative sectors such as medicine, law, or finance, insurers may extend tailored disability coverage options.

It’s crucial to assess your specific needs and industry risk factors when considering disability insurance.

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