Brokers, if you have clients who are small business owners, you know that the owner is the heart of the business. In many cases, the business would have trouble continuing if the owner was unable to work. Likewise, the owner would have trouble paying his personal bills if his business could not continue.
Fortunately, disability insurance offers solutions for both of these challenges. An individual disability insurance policy protects the owner’s earning power while a business overhead expense insurance policy helps the business pay its bills.
Business Overhead Expense Insurance Definition
Business overhead expense insurance, or BOE insurance for short, is a type of disability insurance policy designed for small business owners. If the business owner is unable to work due to a disability, the BOE policy provides monthly benefit payments to cover overhead costs and help the business remain open.
If your business owner clients don’t have BOE coverage, now is the time to cross-sell this important protection. Below are answers to some of the frequently asked questions about BOE.
1. Who does a business overhead expense policy cover?
BOE insurance covers business owners, especially small to medium business owners running companies that depend on their involvement. This type of insurance is particularly crucial for principals of closely held businesses or practices. Professionals such as physicians, lawyers, accountants, and engineers often find themselves in situations where their ability to generate income directly impacts whether their office remains open or closed. For these individuals, business overhead expense insurance provides a safety net, ensuring that the business can continue to operate smoothly in their absence. By protecting against unforeseen disruptions, BOE insurance helps maintain the stability of the business, allowing owners to focus on recovery without the added stress of financial strain. Policies can typically be renewed each year until the business owner turns 65.
For example, let’s say Sam owns a catering company. He has hired two assistants, but he does the majority of the cooking himself. Then he’s diagnosed with cancer, and he has to take time off to focus on his treatments. During this period, his BOE policy can cover his company’s monthly payments so he doesn’t have to close the business he worked so hard to build.
2. What does BOE protect against?
BOE protects against covered injuries and illnesses. If an insured business owner is unable to work because of a covered disability, the policy will provide monthly payments to cover business overhead expenses and help keep the business running.
3. What business expenses does the BOE monthly benefit cover?
BOE benefits are based on the covered business’s actual expenses. BOE benefit payments can cover many of the expenses needed to keep a business operating. These expenses may include rent, utilities, salaries, office equipment expenses, accounting fees, payroll taxes, property taxes, professional membership dues, professional subscriptions, and insurance premiums for employees. BOE insurance policies may also cover the salary of a temporary employee hired because of the owner’s disability.
Key Benefits of Business Overhead Expense Insurance
- Running Your Business: One major advantage is the ability to pay salaries, ensuring that valuable employees are retained and the business continues to function smoothly. This stability is crucial during challenging times when the owner is unable to contribute.
- Covering Fixed Expenses: BOE insurance assists in covering ongoing fixed expenses such as rent, property taxes, and utilities, which are essential for keeping the business premises operational and preventing any disruptions.
- Target Audience: This insurance is particularly beneficial for professionals like physicians, lawyers, accountants, or owners of closely held businesses who rely on their income to meet these fixed expenses.
When determining an appropriate maximum monthly benefit, business owners should add up all of their covered expenses. As a business grows, and as inflation impacts business operations, these expenses will likely increase, so it’s important to reassess the coverage amount periodically and increase it as needed.
By providing comprehensive coverage for necessary expenses and offering financial stability, business overhead expense insurance is a critical tool for business owners planning for unexpected disruptions.
4. What business expenses aren’t covered by BOE?
BOE policies do not typically cover inventory costs. While some taxes – like payroll and property – may be covered, income taxes are generally excluded. Additionally, BOE covers the salary of employees, and in some cases, it may even cover the salary of a worker hired to replace the insured, but it does not provide payouts to replace the insured’s personal salary. This is why many business owners purchase two types of disability income insurance: a BOE policy for their business and a personal disability policy for themselves.
What exclusions apply to business overhead expense insurance?
Understanding exclusions is crucial for clear expectations. Benefits will not be paid for disability if the disability results from:
- An act or accident of war, whether declared or undeclared.
- Normal pregnancy or childbirth, though disabling complications from either may be covered.
By knowing these exclusions, business owners can better plan their insurance strategy, ensuring comprehensive coverage where needed.
5. How long will BOE pay benefits?
BOE insurance is designed to cover temporary disabilities. Policies typically provide benefit periods between 12 and 24 months. This benefit period gives the business owner enough time to recover or to make other arrangements for the business, such as hiring a replacement worker or selling the business.
6. What is the BOE elimination period?
The elimination period is a waiting period that starts when the insured becomes insured and ends when the insurer begins payouts. BOE policies typically have elimination periods that are 30, 60 or 90 days long, and the business owner will not receive benefits during this time. For businesses operating on a tight budget with small reserves to cover ongoing expenses, a short elimination period may be ideal, although this can raise the BOE premium. Business owners who want to keep their BOE premiums down may want to go with a longer benefit period and build up some cash reserves to cover the longer wait.
7. How much does BOE pay out?
If the insured experiences a qualifying disability, BOE insurance will provide a monthly payout. This payout will cover all qualifying expenses up to the monthly maximum.
BOE insurance policies typically work on a reimbursement basis to cover actual overhead expenses, providing a reimbursement for 100% of covered expenses, up to the benefit maximum.
However, actual expenses can vary from month to month, and in many industries, this may be hard to predict with complete accuracy. If the maximum benefit amount is not used in a given month, the policy may allow the unused portion to roll over to the next month to increase future monthly maximums. This can be helpful for business owners with fluctuating expenses.
Over time, a business’s operating expenses may grow as the business grows. If the expenses become more than the monthly maximum, the business owner may need to talk to increase the maximum benefits in place. Periodic reviews of the business’s coverage needs can ensure that adequate insurance is in place.
8. Are there any tax breaks for the business owner?
BOE premium payments are a business expense. As such, they can be tax deductible. Brokers should make sure to tell their business clients this when discussing coverage and costs. The BOE insurance tax write-off may make coverage more affordable for business owners who would balk at the cost of BOE insurance otherwise.
9. How does BOE differ from disability insurance?
Disability insurance and BOE insurance are similar, but they are not identical. Both provide coverage in case the insured experiences a disability. However, personal disability insurance provides payouts to replace the insured’s income and protect personal finances, while BOE insurance provides payouts to keep the business operational.
BOE insurance does not cover the salary or personal expenses of the business owner. It’s designed to keep the business afloat during a period of disability; it is not designed to help the business owner with mortgage payments, utilities, groceries and other living expenses.
10. Should business owners have both BOE and disability insurance?
Because personal disability insurance and BOE cover different expenses, it is important for business owners to maintain both types of coverage. They need to protect both themselves and their business.
To see how having only one type of coverage can become a problem, consider a business owner named Kelly. She owns a small medical practice. She’s purchased a personal disability insurance policy that covers about 60% of her income, so she thinks she’s protected. Then her arm is badly injured while she’s on vacation, requiring multiple surgeries, and she has to take time off work. Her personal disability insurance policy barely covers her mortgage and other personal expenses, and there’s no money leftover to cover the practice’s lease and other ongoing expenses. She’s running out of savings quickly, and she worries she might have to close her practice permanently.
As this example shows, many business owners need BOTH kinds of disability coverage; this is a good cross-selling opportunity for insurance brokers.
Ready to tell your business owner clients about this important added protection? Download our “What’s Covered by BOE?” handout today.