Plain version: a disability can hurt a business as well as a family, and different policies protect different pockets. Who pays the premium also decides how the benefit is taxed.
Uses of disability income coverage:
Individual disability income policy: replaces the insured's own lost earnings.
Business overhead expense policy: pays ordinary operating costs, such as rent, staff salaries and utilities, while the owner is disabled. It does not replace the owner's own salary, so an owner may need both.
Business disability buyout policy: funds a buy-sell agreement so the business or other owners can buy a totally and permanently disabled owner's share.
Key employee and partner policies: pay the business to offset lost revenue or replacement costs, not to buy an ownership share.
Group disability income policy: an employer plan that replaces workers' income.
Rating factors: age, gender, job classification, avocations (such as racing) and health, past and present, all affect the chance and length of disability.
California: race, color, religion, national origin, ancestry or sexual orientation cannot by itself support a higher rate. Sex-based differences are allowed when supported by objective, valid, up-to-date actuarial data or sound underwriting, unless other law prohibits them.
Change of Occupation provision: if the insured moves to a more hazardous job class, the insurer pays only what the premium paid would have bought at the more hazardous rates. A move to a less hazardous class lowers the rate and returns the excess unearned premium.
Federal income tax:
Individual policy that the insured pays for: premiums are not deductible (even for a self-employed person, when the policy pays for lost earnings), and benefits are not taxable income.
Business overhead expense policy: premiums can be deducted as a business expense.
Group policy: the employer deducts its premium as an ordinary and necessary business expense, and its contribution is generally excluded from the employee's wages. Benefits due to the employer's payments are taxable to the employee; benefits due to the employee's own after-tax payments are not.
Example: the employer paid 60% and the employee 40% with after-tax dollars. Of a $3,000 monthly benefit, $1,800 is taxable income.