Several years ago I wrote a blog post on the differences in residual for individual disability insurance. In my given scenario one carrier would pay out over $25,000 more than the other! With so much disparity in the individual product benefits, I decided it would be good to compare options under the residual definition with the business overhead product as well.
First, a quick review. What is business overhead coverage and what is it used for?
Business overhead expense disability insurance is a reimbursement product that is for small business owners. The policy reimburses the business owner for business expenses during a disability so the client can keep the business open during a disability, and also have a solid business to come back to when he or she is hopefully able to recover.
Having a residual or partial rider on a business overhead policy is important as there are many claim scenarios in which an insured may be able to work part of the time but not able to work full time. In many situations, there is a loss of revenue but not necessarily a decrease in expenses. So, I’ll use the same scenario as my original residual post, just reframed for business overhead!
Consider the following scenario:
Your client, a 56-year-old contractor, has a back issue. He has continued to work and is able to do all of his job duties but is only able to put about 70% of his normal time in at work. Thankfully, he had numerous jobs going before his disability so he didn’t see a decrease in his income for about six months. Assuming a disability duration of just over one year, how might his benefits paid vary by carrier, assuming a business overhead policy with a total benefit amount of $10,000/mo., a 30-day elimination period and a residual rider or partial? Below are three different answers:
- White Collar Carrier: $60,000 payable
- Blue Collar Carrier 1: $0 payable
- Blue Collar Carrier 2: $0 payable
Why the disparity in benefit amounts?
White Collar Carrier: The client would not qualify for any benefits the first 6 months of disability since there was no loss of business income. After six months, assuming at least a 20% loss of business income, the policy has a feature that pays a minimum of 50% of the benefit for the first six months. This policy also has a recovery benefit feature included. After the client is back to work on a full-time basis and no longer eligible for a total, partial or residual benefit, a recovery benefit is paid. Basically, the policy will pay over 12 months the total of eligible expenses during the disability minus the total benefits paid.
- Initial period: 6 months x ($10,000/mo. benefit x 50%)= $30,000
- Recovery period: $10,000/mo expenses x 6 months of claim= $60,000- $30,000 already paid= $30,000
- Total Benefits Received: $60,000
Blue Collar Carrier 1: This carrier does not offer a residual rider on their business overhead but they do have a partial benefit built in with a max of 6 months of benefit. However, the partial benefit only applies after a period of total disability. In the scenario described, the client would not qualify for total disability since he was able to continue working on a part time basis and therefore would not qualify for any partial benefits under his business overhead policy.
- Total Benefits Received: $0
Blue Collar Carrier #2: This carrier also does not offer a residual rider but does have a partial benefit built into the business overhead policy. To qualify for the partial benefit, the client would not need to have a period of total disability first however he would need to have at least a 50% loss of time and/or not be able to perform one or more duties of his occupation. In this case, a loss of time of 30% would not be enough to qualify him for the partial benefit.
- Total Benefits Received: $0
These are generalizations, meant to illustrate the importance of contract language so please check the specific product language of the carrier you are selling (or call and ask us)! Also, I firmly believe that some coverage is always better than none at all. If the premium of a white collar carrier is prohibitive then it would be in the client’s best interest to have a blue collar type policy even if the definitions are not as comprehensive.
Call on DIS for the advice you need to protect your clients’ paycheck and business! Need a great Business Overhead Expense (BOE) flier to share with your clients? Download one here.
