How to Insure Your Income: Business Overhead Expense
When some small companies lose an owner to a disability, some or all of their cash flow can be interrupted. This is particularly true of professional services groups, such as law firms, ad agencies or medical offices.
One solution to this problem is the business overhead expense (BOE) policy.
This type of disability income policy reimburses the business (not the business owner) for actual overhead expenses incurred during a period of total disability of the owner. Typically, this policy is sold with an elimination period of 30 to 90 days and a benefit period of one or two years. The amount of coverage provided is directly related to the average overhead expenses incurred by the business.
Examples of covered overhead expenses under the BOE include:
- employee salaries, fringe benefits and payroll taxes;
- rent, telephone and other utilities;
- accounting and legal fees;
- insurance premiums; and
- other necessary expenses incurred in the operation of the business.
A caveat: The disabled owner's salary is not covered under the BOE. The cost of equipment or furniture also normally is excluded.
Most insurance companies only offer BOE policies to relatively small businesses. General Motors would not be eligible for a BOE, due to the amount of overhead expenses necessary to operate the company -- and the fact that, if its CEO became disabled, GM would continue to operate without suffering any direct financial losses.
Since the BOE reimburses for expenses actually incurred, the monthly benefit payable under the policy may vary. Thus, if the policyowner has a maximum benefit of $5,000 per month, the actual benefit paid could be less than $5,000 -- depending on the amount of overhead expenses in a particular month.
One variation on the standard BOE policy permits the policyholder to apply unused benefit dollars from one month to cover expenses that exceed the maximum benefit in another.
Another variation permits unused benefit amounts to be applied to expenses incurred after the end of the benefit period. In essence, this extends the benefit period equal to the amount of unused benefit dollars.
A unique feature of the BOE policy is its tax treatment. The premium paid is tax-deductible to the business as a necessary business expense. This results in taxable benefits paid to the business during a period of disability. However, these benefit payments are used to pay tax-deductible business expenses, thus washing away the tax liability.
