Disability insurance, which provides an income if you're injured and unable to work, is a must for most small business owners. There are two main types of disability policies:

1. Short-term disability covers a worker for up to a year. Typically, it's used for short-term illnesses, accidents, maternity leave or mental disabilities.
2. Long-term disability covers a worker for years — sometimes until Social Security kicks in. This is the most important type of disability insurance to have.
3. Residual or partial disability coverage allows an employee to work part time and still receive benefits to make up for lost income. Important but optional riders can provide for cost-of-living and future earnings increases.

Action Steps
The best contacts and resources to help you get it done

Look at the benefits and elimination periods

The benefits period defines how long the policy will provide you an income. Most insurers offer benefits lasting two to five years, up to age 67 or for life. The longer the benefit period, the more expensive the policy. The elimination period is the length of time between the onset of the disability and when the insured starts receiving benefits — typically 30 to 90 days. A longer elimination period lowers the cost.

I recommend: To get an estimate of how much disability insurance you need, calculate how much you spend each month. See MetLife's disability insurance calculator to help you get started.

Understand the contract

Disability policies may be non-cancelable, which locks in rates and benefits, or guaranteed renewable, which gives the insurer the right to raise prices for specific reasons.

I recommend: The Insurance Information Institute provides information about the various types of disability insurance, policy options and additional riders.

Look for financial stability

Make sure the insurance company you purchase your policy from is financially stable.

I recommend: Your insurance agent or company representative can provide information, or check insurance company ratings through a rating agency such as A.M. Best Company Inc..

Consider the cost

Prices vary widely, based on gender, health history and occupation. Premiums typically cost between 1 and 3 percent of annual income. The riskier the business, the more expensive the coverage.

I recommend: Contact the National Association of Insurance Commissioners to identify reputable disability insurance carriers in your state.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Disability insurance doesn't cover 100 percent of a salary. Insurers want people to have an incentive to go back to work. Most disability policies cover 40 percent to 80 percent of gross income.
• •  You can keep the cost of disability insurance down by electing a longer waiting period before benefits begin or shortening the benefit period. But remember, cost isn't everything. Getting the right coverage for your kind of business is key.
• •  Rehabilitation riders cover the cost of retraining. It's an option worth considering for yourself or your employees.
• •  Only the most expensive policies pay benefits until retirement. Two to five years is typical.
• •  If you pay disability benefits for an employee, he must pay federal and state income tax on those benefits, although paying these taxes for a disabled employee is a wonderful, and relatively common, gesture. Individual disability coverage is tax-free for the person paying the premium.
• •  If the policy is for you, you'll want a broad definition of disability. If you're buying the policy for a small company, a narrower definition will be the more affordable choice. The best option is 'own-occupation disability,' which pays benefits even if the disabled worker can do some other tasks. 'Any-occupation disability' policies do not provide benefits unless you or your employees are totally unable to work.