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.
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.
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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 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:
- Utilities
- 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.
