David Cummings on Startups

Startups and Disability Insurance

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David Cummings

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One area that is often difficult for startups is insurance. Difficult in the sense that being so small, with so few employees, if any, rates are typically high and options are low. Now health insurance is always considered the most important insurance, and it is, but another type of insurance that isn’t talked about as frequently is disability insurance.

In the past two weeks I’ve talked with entrepreneurs that mentioned situations where disability insurance would have been valuable. One entrepreneur had an employee with cancer that took significant time off. Another entrepreneur had a key employee that was pregnant and needed bed rest for the last two months of the pregnancy. In both cases, disability insurance would have been beneficial but the entrepreneurs didn’t have it.

Short term disability insurance usually pays 60% of the employee’s salary for up to 12 weeks, with a maximum of $5,000 per month while long term disability is usually more customized. At a cost of $30 – $70 per employee per month, it becomes clear that having a single issue arise more than pays for itself. Hopefully, an issue will never come up.

My recommendation is to look into disability insurance and purchase it if you can afford the payment. Insurance is usually cost effective and helps give piece of mind to the entrepreneur and team members.

Comments

3 responses to “Startups and Disability Insurance”

  1. Angus McRae Avatar
    Angus McRae

    Of the two, short- and long-term disability, short-term coverage should be thought of as a luxury. Employees should be encouraged to put 12 weeks of take-home pay in the bank for such emergencies. Short-term is not a great insurance buy as you are trading premium dollars for claims dollars. but, it is a good employee benefit especially if you have a large female employee population (that may be making maternity claims).

    Long-term disability, however, is the second most important insurance purchase after health insurance. Becoming disabled and not having the capacity to earn a paycheck for the next 20 or 30 years is truly a catastrophic risk. Group long-term disability coverage is surprisingly inexpensive. And there are number of pro tips to minimize the tax consequences in the event of a claim.

    So if you have scarce benefit dollars put them into long-term disability coverage.

    Good topic, David. Thanks for raising the issue.

    Reply
    1. David Cummings Avatar
      David Cummings

      Thanks Angus. Good point about short-term disability not being as important, but worthwhile if you have a large female employee population that might be making maternity claims in the future.

      Reply
  2. Eric in Atlanta Avatar
    Eric in Atlanta

    This is a great topic. I love your blog and have been using the insights for a start up, but this post is more germane to my “day job.”

    LTD and STD shouldn’t be considered luxuries. As your start up grows and you seek new talent, you’ll be competing with companies who have the ability to offer life and disability to all.

    For years, start ups and other companies looking at growth have looked at Professional Employer Organizations to offer benefits, including multiple disability options, while keeping overhead costs extremely low. In most cases, even the smallest start ups can provide basic benefit options including disability, while freeing the employee to “buy up” at lower-than-market rates if they wish. At the same time, the relationship offers payroll and tax compliance, and the infrastructure support that can reduce the need for administrative headcount. Frequently, the it is the PEO relationship that makes a start up more attractive to employees and investors.

    There are a few reputable, national PEO’s doing business in Atlanta and one focused on VC, PE, their portfolio companies and start ups. Perhaps they’re worth a look.

    Thanks again for all of the time you put in om 10,000 Hours…

    Reply

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