If a business owner becomes disabled due to injury or sickness, there will not only be a personal loss of income but there will likely be significant consequences to the company. Business expenses and operations costs will not stop when a disability strikes a business principal. Business overhead expense (BOE) insurance is designed to reimburse the company for certain business expenses if the business owner is disabled.
Key Takeaways of Business Overhead Expense Insurance
-
BOE insurance helps cover fixed business expenses if a business owner becomes disabled, ensuring operations can continue during recovery.
-
Policies typically provide benefits for 12-24 months, allowing time for the owner to return or make long-term decisions like selling or dissolving the business.
-
BOE insurance reimburses actual overhead expenses, with payments made monthly based on the policy limit and business expenses from the prior month.
-
BOE insurance premiums are tax-deductible, but the benefits received are considered taxable income by the IRS.
-
Covered expenses include rent, utilities, salaries of non-owner employees, insurance, and business taxes. However, it does not cover the owner’s salary, replacement wages, or salaries of similar professionals in the same practice.
What is Business Overhead Expense Insurance?
In the event that a business owner is disabled, business overhead expense insurance provides funds that can be used to recover certain operational expenses of the company. The income provided by a business overhead policy should allow the company to continue operations during the business owner’s disability. Policies are usually purchased for short term periods ranging from 12-24 months depending on the needs of the business. They are designed to “buy time” while the business owner recovers from a disability. If the disability is expected to be long term or permanent, the company can be sold at fair market value or dissolved.
Business overhead insurance is usually most important for small business owners or those with their own technical practice such as physicians, attorneys, accountants, etc.
trusted by 5,000+ clients
Compare Disability insurance Rates
See rates and benefits tailored to your business needs.
How Does Business Overhead Expense Insurance Work?
Business overhead expense insurance is a reimbursable contract and pays benefits only after actual expenses have been incurred. In most cases, the policy will not pay a consistently flat benefit because expenses tend to fluctuate. Benefit payments are usually paid monthly up to the monthly policy limit. Policies can be written at various maximum monthly benefit amounts up to $30,000. If monthly expenses exceed $30,000 there may be other options aside from a traditional business overhead policy.
In the event a business owner or principal becomes disabled there is a short “waiting period” before benefits become payable. This short period, called the elimination period is usually 30-60 days and is selected by the insured at the time the application is underwritten. Once the elimination period has been met, benefits begin to be paid based on the policy limits as well as the amount of covered expenses incurred the previous month.
There are several methods companies use to pay benefits during periods of fluctuating monthly expenses as well as additional policy options. A careful review of the actual policy language with respect to how benefits are paid is essential to assure the correct policy is selected.
Premium payments for business overhead expense insurance are considered by the IRS to be a tax deductible business expense. When benefits are received, they are considered income. Of course, as soon as ordinary business expenses are paid they become deductible as well.
Typical Expenses Covered Under a Business Overhead Policy
Business expenses generally covered by a business overhead expense insurance policy may include:
-
Utility bills
-
Leased equipment
-
Office supplies including postage
-
Salaries of non-owner, non-family employees
-
Normal rent, lease and possibly mortgage payments
-
Insurance premiums including property, liability and malpractice insurance
-
Legal and accounting fees
-
Business taxes
-
Furniture and other business equipment
Expenses covered under business overhead insurance policies will differ among insurance companies. Please review the contract language of your policy carefully to make sure that your expenses will be covered.
Expenses Not Covered in a Business Overhead Policy
The list of business expenses that are not covered in typical business overhead expense policy may include:
-
The salaries of the business owner’s.
-
Wages and salaries of anyone coming in to replace the covered individual.
-
Salaries of individuals employed in the business that do the same type of work as the covered individual (Dentists in a dental practice). If one Dentist is disabled, another Dentist in the same office can continue earning an income.
-
Family members who were not working in the business prior to a disability.
Most business expenses are covered under a normal business overhead expense policy. However, we encourage you to examine competing policies carefully. If you have additional questions about business overhead expense insurance or need to obtain a custom quote, please call MEG Financial at (877) 583-3955.
Frequently Asked Questions about Business Overhead Expense Insurance
What is a Business Overhead Expense Policy?
A business overhead expense (BOE) policy is an insurance plan designed to cover essential operating costs if the business owner becomes disabled and cannot work. It helps keep the business running until the owner recovers or makes other arrangements.
What Does a Business Overhead Expense Policy Cover?
It typically covers rent, utilities, employee salaries, payroll taxes, office supplies, equipment leases, and other fixed expenses necessary to maintain business operations. Some policies may also cover accounting and legal fees.
What Does a Business Overhead Expense Policy Not Provide?
It does not replace the business owner’s personal income or long-term business losses. It also won’t cover new investments, expansion costs, or the salaries of a temporary replacement for the owner.
Are Business Overhead Expense Policy Benefits Taxable?
Yes, the benefits are considered taxable income since they cover deductible business expenses. However, because those expenses are tax-deductible, there is no net tax impact on the business.
Conclusion and Summary of Business Overhead Expense Insurance
Business Overhead Expense (BOE) insurance is an essential safeguard for business owners, particularly those in small practices or technical fields. It provides financial support to cover operational expenses when the owner is unable to work due to a disability, ensuring the business remains stable during recovery. With benefits typically lasting 12–24 months, BOE insurance allows time to make informed decisions about the company’s future, whether that means returning to work, selling, or dissolving the business.
While premiums are tax-deductible, benefits are considered taxable income, making it crucial to understand policy terms before purchasing coverage. Selecting the right BOE insurance policy requires careful review to ensure it aligns with your business needs.
