Business overhead expense insurance
This is a special form of disability insurance that covers business expenses when one of the owners or a key person is disabled. This insurance covers rent or real estate expenses, wages, utilities, and other operating expenses that still need to be paid to keep the business running, even when the owner is unable to attend to his or her normal responsibilities. Business overhead expense insurance covers these expenses when the owner is disabled for an extended period from a few months up to a few years or longer.
Compared to personal disability income insurance
Let’s take a quick look at personal disability income insurance, because business owners have common misconceptions about business overhead expense insurance compared to personal disability income insurance. It’s easy to confuse the purpose of these types of insurance. One or both types may be appropriate for a business owner.
Many business owners don’t feel they need personal disability income insurance, because they believe that their business will run and provide income for them, even if their not around to perform their normal role in the business.
Personal disability income insurance replaces an individuals personal income, so that if the owner’s income is drawn from the business, the owner feels they dont’ need disability insurance.
Unfortunately, this is flawed logic. An owner’s absence for a few weeks may not strain the business that much, and the owner may well still be able to draw income from the business. However, drawing income from the business over the long term, could lead to failure.
Disability insurance makes monthly payments to you that function like a paycheck when you’re disabled and can’t work. But if you’re a business owner, then you may also need funds to keep running your business while you’re recovering. For that, you need business overhead expense insurance, also known as BOE insurance.
Business overhead expense insurance covers the costs of running your business when your absence, due a disability, means those costs would go unpaid. The expenses covered by BOE insurance include important day-to-day functions like paying wages, debts, rent or mortgage, and taxes.
Disability insurance and BOE insurance are complementary. Not only do they function the same way – you’ll recognize BOE terms like elimination period, benefit period, and presumptive disability from your disability insurance policy – but disability insurance also covers you where BOE does not. Notably, BOE doesn’t cover your lost wages when you become disabled; you’ll need disability insurance for that.
Read on:
How does business overhead expense insurance work?
Which business overhead expenses are covered?
What’s not covered by BOE insurance?
Is BOE insurance tax-deductible?
How does business overhead expense insurance work?
As a business owner, you may not be able to afford missing an extended period of work because of an illness or injury. Even just a few months away may cause your company serious financial harm. When you have BOE insurance, the insurer will pay you monthly payments to cover your expenses so your business can continue to operate smoothly.
Who qualifies for BOE insurance?
To get BOE disability insurance, you have to be between the ages of 18 and 64, and you have to have been in business for at least two years. Insurers typically don’t let you take out BOE insurance if you work from home. You’ll also need to show a certain amount of revenue, like how applying for disability insurance requires proving your income.
How long does BOE insurance last?
The benefit period is the span of time during which the insurer will pay you monthly benefits. Business overhead expense insurance typically has a benefit period of either 18 or 24 months. A 12-month benefit period may also be available if you apply for the policy between age 61 and 64. Note that benefit payments will also end when you recover enough to return to work.
What is BOE insurance’s definition of disability?
The definition of disability is used by insurers to determine whether you qualify for benefits. If you don’t meet the definition of disability, then your claim may be rejected. For BOE insurance, you must not be able to perform the material responsibilities of the job, and you must be under the care of a physician for your disability.
What is BOE insurance’s elimination period?
The elimination period is the time you have to wait after becoming disabled before the insurer will begin paying your benefits. The elimination period, also called the waiting period, for BOE insurance is similar to that of income protection disability insurance: 30, 60, or 90 days. Selecting a longer elimination period, meaning there’s a higher chance you’ll recover from an injury or illness before the insurer has to pay benefits, can save you a lot of money on your premiums.
How much does BOE insurance pay?
You can choose your maximum monthly benefit amount when you take out the policy. Good BOE insurance coverage should pay 100% of your monthly operating expenses up to your maximum monthly benefit amount.
During the time you receive benefits, if you had lower expenses in one month, it’s possible for unused monthly benefits to “roll over.” That is, when you’re disabled, your available monthly benefit is equal to your base annual benefit minus the sum of all monthly benefits claimed so far that year. For example, over a two-month period, if your base monthly benefit is $10,000 per month, but you only used $9,000 the first month, then your BOE insurance can pay up to $11,000 in expenses the next month.
What other BOE features are available?
Your BOE insurance is guaranteed renewable, meaning that, as long as you keep paying the premiums, the insurer can’t cancel or modify the terms of your policy. Some insurers allow you to renew your policy after age 65, but that will be determined on a case-by-case basis.
Your policy could also have residual disability benefits, which means coverage when you’re not totally disabled. You’ll receive partial benefit payments if you become disabled but not severely that you can’t do some of your duties.
Business overhead expense insurance can also pay to help you get better and become rehabilitated. This is called recovery benefits. But if you suffer a disability so severe that it’s immediately evident that you won’t recover – such as losing limbs, going blind or deaf, or losing your ability to speak – then you could qualify for your BOE coverage’s presumptive disability benefits.
You may be able to convert your BOE insurance to an income protection disability insurance policy for yourself. You might do this if you decide to become an employee somewhere else, or if you’re more concerned about living without an income than paying business expenses in the event of a disability.
Which business overhead expenses are covered?
Business overhead expenses insurance covers a range of “usual and customary” business expenses. These include the following:
Wages
This means payroll as well as contributions for benefits. Your BOE insurance may also partially pay the salary of a substitute employee you need to hire to take over your responsibilities. A rider is also available for purchase that would pay a greater sum to your substitute so that his or her salary more closely matches your own.
Your BOE insurance should also cover payroll taxes.
Office expenses
These include paying utilities as well as equipment. Your BOE policy should also include coverage for custodial services and even laundry.
Dues and fees
These include licensing fees as well as professional and trade dues.
Debts
Coverage for debt includes paying for accounting, billing, and collection services. It can also pay the cost of making installment payments on debt your business had prior to your disability.
Real estate
Among covered business expenses are payments for your office’s rent or mortgage. Associated property taxes should also be covered.
Insurance premiums
Yes, your business overhead expense insurance benefits can be used to pay for other types of insurance. Your property and liability insurance premiums are covered. If you subsidize your employees’ life insurance or disability insurance coverage, those premiums could also be covered as contributions to benefits.
Takeaway
Disability insurance is meant to replace your income when you become disabled.
What’s not covered by BOE insurance?
While BOE insurance covers many types of costs you’d be on the hook for when running the company, some expenses are not covered. These include:
Your own wages and profit, nor those of people who pay a share of your business expenses.
The wages and profit of any of your relatives, unless they were employed by your company 60 days or more before your disability.
Costs that are covered by another source, including those passed on to customers.
Additions to the office space, including furniture and renovations, paid for after your disability.
If you need coverage for your own wages while you’re disabled, you need to have a personal disability income insurance policy.
Is BOE insurance tax-deductible?
As with other business expenses, your premiums could be tax-deductible. However, your benefits may be taxable as business income. The opposite is true for income protection disability insurance, where your benefits are generally not taxed if you paid your premiums with your after-tax, or net, income.
But business expenses you pay for with your BOE insurance benefits may be tax-deductible just those you pay for with your revenue. Talk to a tax professional to make sure.