Dear Clients & Friends,
I’m a safety guy. You all know it. I talk about it all the time. Risk management fulfills two purposes: it protects those who rely on us (and on our ability to earn income and it allows you and I (client and advisor) to sleep peacefully at night. Risks come in many different shapes and sizes – some are obvious, and some are not. Recently, while assisting a long loooong time friend and brilliant gastroenterologist with a unique type of insurance, it occurred to me that the topic of this article is one of those not-so-obvious risks that many small business owners, and partners of small businesses, need to be aware of.
Maybe this topic applies to you, or maybe it applies to your children/grandchildren. But if you or someone you know is a business owner, read along.
What is Business Overhead Expense Insurance?
Business overhead expense insurance (BOEI) is a type of disability insurance that's designed to protect your business if you become disabled. Specifically, it provides monthly payments to your business for a specified period of time so that your business can remain open in the event of a disability. For example, if a key person such as a partner in a medical practice becomes disabled and is therefore unable to generate the revenue necessary to pay expenses, BOEI will pay these routine and unavoidable overhead expenses. Though the partner (or owner) is the insured party, the business is the owner and the beneficiary of the policy.
Often a business or partner might find themselves using personal funds or taking on debt to meet these business expenses. In extreme cases, with high fixed monthly expenses, owners have been forced to close the business. With BOE coverage, you'll be able to keep your business afloat, at least for a period of time. And if you decide to sell your business after becoming disabled, the benefits paid under such a policy can keep your business operating and give you some breathing room to find a suitable buyer at a reasonable price.
Keep in mind that BOEI doesn't replace the personal disability insurance that you need to have. Personal disability insurance is intended to replace personal income so that you and your family can continue to earn money and pay bills in the event of a disability. Personal disability coverage is for your family. BOE insurance, on the other hand, benefits the business entity itself.
Business expenses eligible for reimbursement usually include:
• Lease, rent, or mortgage payments
• Loan and mortgage interest
• Utilities and telephone
• Laundry, janitorial, and maintenance services
• Accounting and legal services
• Professional trade dues and subscriptions
• Automobile expenses
• Employee benefits
• Employee salaries (not including yours)
• Salary for a professional replacement for your position (depends on policy)
• Equipment depreciation
• Equipment lease payments
• Insurance premiums
• Other fixed expenses normally incurred in running the business
However, certain expenses aren't eligible for reimbursement under most policies:
• Your salary (this is why BOEI is not a replacement for personal disability coverage)
• Salaries of family members hired after the onset of your disability
• Salaries of any other co-owners who are members of your profession or occupation (e.g., your business partner in a medical or legal practice)
Benefit period is subject to time limits
There are two important time periods to keep in mind when considering BOEI policies: the elimination period and the coverage period. The elimination period is a waiting period between the beginning of your disability and the start of the benefit payments. The elimination period is commonly 30, 60, or 90 days. Policies with longer elimination periods have a lower premium. The coverage period is the maximum length of time that benefit payments will be made - usually 12, 18, or 24 months. You choose both the elimination period and the coverage period when you buy the policy. Benefit payments begin after the elimination period and continue for either the length of your disability or the coverage period, whichever is less.
Benefits can vary and are subject to a monthly maximum
During the coverage period, the policy will reimburse your business each month for its overhead expenses up to a certain amount. This reimbursement cutoff is known as the monthly benefit. When you buy the policy, you select the monthly benefit based on your business's normal monthly expenses. Since expenses can vary from month to month, the actual amount paid each month can also vary. Generally, the actual monthly payment from the insurance company will either be the amount of your business's actual expenses for that month or the amount of your monthly benefit, whichever is less.
Some policies allow your business to carry any difference between its actual expenses and the monthly benefit from one month to the next. For example, if during one month your expenses are less than the amount of the monthly benefit, your business will accumulate extra funds to offset months when its monthly expenses exceed the amount of the monthly benefit. Some policies will pay benefits past the end of the coverage period until the balance that you're carrying forward is depleted. Since several methods can be used to pay benefits, check with your insurance agent.
Even though you're the insured party under the policy, the business owns the policy and pays the premium. The premium payments that the business makes are deductible as a business expense. As a result, any benefits that the company receives under the policy are treated as taxable income. This taxable income is offset when the business uses the benefit payments to pay deductible business (operating) expenses.
So, that’s a primer on Business Overhead Expense Insurance.
I’m a safety guy. I believe in living a fulfilling life, absent unnecessary anxiety. I believe in making sure that our family is properly cared for, even in the unfortunate event that we are no longer able to provide for them. We humans have a natural tendency to assume invincibility. Unfortunately, this world is more fragile than we want to believe.
Self-employment is far more common today than it was generations ago. Let’s live safely, soundly and peacefully. Have a lovely weekend.
Matthew Ramer, AIF®
Principal, Financial Advisor
MOR Wealth Management, LLC
1801 Market Street, Suite 2435
Philadelphia, PA 19103
P: 267.930-8301 | c: 215-694-4784 | f: 267.284.4847 |
601 21st Street, Suite 300
Vero Beach, FL 32960
The majority of this content was written and distributed MOR Wealth Management, all rights reserved. Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a registered investment adviser. Fixed insurance products and services offered through CES Insurance Agency.