On this pageJump to a section
If you are the business, then you are the single point of failure.
A launch can flop and you can rebuild. That is the whole reason to think about income protection first. A server can go down and you can restore it. But if you can't work for six months, there is no backup version of you. I think about insurance the way I think about a good system: it is not exciting until the day it is the only thing standing. It also connects to a question I got from my grandmother, "So what's your retirement plan?", because no retirement plan survives a stretch with no income.
Why does a founder need to think about insurance at all?
Because your income is the thing everything else is built on. Your emergency fund, your retirement contributions and your family's stability all depend on it continuing.
Employees often have a safety net they never chose. The Bureau of Labor Statistics found that in March 2024, 58 percent of private industry workers had access to employer life insurance.3 A solo owner doesn't get that by default. There is no HR department to hand you a form.
I am not trying to scare you into buying anything. I'm saying this belongs on the same list as accounts and cash buffers, so make a decision about it on purpose.
James Shack, a UK financial planner, framed the starting point in a video posted on April 8, 2024: "for most people your most valuable asset is not your home it's you and your future earning potential your human capital."4 The products differ in the UK, but that idea is the reason this article exists. For a founder, the income stream is the asset worth protecting.
What does disability income insurance do?
According to the Maine Bureau of Insurance, disability insurance provides a portion of your income if an injury or illness prevents you from working. Its purpose is to provide benefits sufficient for daily expenses, while not being so large that it discourages you from returning to work.1
The words that decide how it behaves
Policies vary a lot, and the regulator's advice is blunt: the best way to understand your coverage is to read your policy.1 Four terms deserve your attention.
- Disability beginsAn injury or illness stops you from working
- Elimination periodNo benefits are paid, and you generally still pay premiums
- Benefits beginA portion of your income is paid, per the policy's definition of disability
- Benefit periodPayments run for the period the policy states, which can be years or longer
- OffsetsOther income such as workers' compensation may reduce the payment
Definition of disability. Some policies pay if you can't perform the duties of your own occupation ("own occ"). Others pay only if you can't perform any job for which you're suited by training, education and experience ("any occ"). A policy can switch from one to the other, for example after two years.1
Elimination period. This is the number of days from the start of the disability to when benefits become payable. No benefits are paid during it.1
Benefit period. The regulator notes that long-term benefits may continue anywhere from five years to the remainder of a person's life, and says it is important to check a policy's maximum benefit period.1
Offsets. Workers' compensation, Social Security benefits, other insurance and retirement plan benefits are among the income sources that can reduce what a policy pays.1
Pre-existing conditions and exclusions
A condition you were treated for before buying coverage may be excluded for a time, depending on the policy's "look back" and "look forward" language. An exclusion, by contrast, is a condition that is expressly never covered.1 Read both sections.
A tax note worth knowing
The Maine guide says that under current law, disability benefits are not taxed if you pay the premiums, and they are taxable if your employer pays them.1 For a solo owner paying personally, check how your own situation is treated with a tax professional.
What is term life insurance, and who is it for?
Vermont's Department of Financial Regulation describes life insurance as a legal agreement that provides for the payment of a death benefit to your chosen beneficiaries in exchange for a premium. Its primary purpose is to protect surviving family members or dependents against the loss of an individual's income or services.2
Term life covers you for a set period, such as ten years. Benefits are paid only if you die within the term. If you live past it and don't renew, the policy expires with no cash value and no benefits.2
How the regulator suggests thinking about "how much"
Identify your dependents' likely financial needs, list the income and assets your family would have without you, then compare the two. Buy only as much as you can afford, because a policy you can't keep paying for is money wasted.2 The guide also asks you to review coverage regularly as your circumstances change.
The tradeoffs
The Vermont guide says term often provides the greatest amount of insurance for the lowest premium, but it gets more expensive when you buy it older, and renewal premiums are likely to be much higher.2
| Disability income insurance | Term life insurance |
|---|---|
| Pays you if you cannot work | Pays your beneficiaries if you die |
| Protects your income while you are alive | Protects dependents against lost income |
| Terms to learn: definition of disability, elimination period, benefit period | Terms to learn: policy term, beneficiary, renewal, conversion |
| Watch for offsets and exclusions | Watch for premium changes at renewal |
What should you ask before you buy anything?
Regulators publish the questions, so use them.
- How does the policy define disability? Own occupation, any occupation, or a hybrid that changes over time.
- How long is the elimination period? And can you cover your expenses during it from your cash buffer?
- How long will benefits be paid? Check the maximum benefit period.
- What are the limitations and exclusions? Ask about pre-existing conditions and any condition-specific time limits.
- Who are the beneficiaries? Name them, and keep the designation current when your life changes.
- Who is selling this, and how are they paid? Ask directly, and talk to more than one licensed professional.
Insurance is the least glamorous part of a plan, which is probably why so many owners skip it. Pair it with your two cash buffers, because a long elimination period only works if you have cash behind it. And keep going through the Investing and Retirement hub, where the next foundations are coming.
Educational content, not financial, tax, legal or investment advice. Talk to a licensed professional about your situation.
Keep building.Ekai
Questions people ask
What does disability insurance do?
The Maine Bureau of Insurance describes disability insurance as providing a portion of your income if an injury or illness prevents you from working. Benefits are meant to meet daily expenses without being so large that they discourage a return to work.
What is an elimination period?
It is the number of days from the start of a disability to the date benefits become payable. During that time no benefits are paid, and you are generally still responsible for premiums.
What is the difference between own-occupation and any-occupation?
An own-occupation definition pays if you cannot perform the duties of your own occupation. An any-occupation definition pays only if you cannot perform any job for which you are suited by training, education and experience. Some policies switch from one to the other after a set period.
What is term life insurance?
Term life covers you for a set period. Benefits are paid only if you die within that time, and if you outlive the term and do not renew, the policy expires with no cash value and no benefits, according to Vermont's regulator.
Can I get group coverage as a business owner?
Employees often get coverage through an employer, but a solo owner generally has to arrange individual coverage. Group coverage can also end when you leave the employer.
Sources
- 1
- 2
- 3
- 4
