The vast majority of people greatly underestimate the possibility of suffering a significant disability that hinders their work. In fact, the probability of a person being disabled for three months or more is just over 25%. These odds increase significantly if a person is overweight, smokes, or has chronic diseases such as diabetes, high blood pressure, and/or heart disease. It also depends on the profession: typically, physically demanding jobs carry a higher risk than established ones. However, disability from illness is often not career-sensitive: for example, cancer doesn’t care if you sit behind a workbench in construction.
Fortunately, many people have disability insurance through their employers, so if they are unable to work for a long period of time, some of their income will be covered, although there are often gaps in this coverage and will be covered in another article. However, self-employed business people, especially those whose expertise is the financial lifeblood of their organizations, such as physicians, dentists, lawyers, consultants, have two problems when they are disabled: first, to replace the income they lost while not working, and second, to keep their business alive during their recovery. This is the second topic I will cover in this article, as financial advisors and insurance agents rarely deal with it. The type of insurance that helps sustain a business while its primary source of income is in recovery is called Business Overhead (BOE) Disability Insurance (DI) or Business Expense Insurance (BEI). In short, I will use BOE as it is the most common initial format in the industry.
Sole proprietors and small professional groups are particularly susceptible to loss of full or partial income when the primary income generator is out of work for an extended period of time. For example, a doctor or dentist who is a sole practitioner is at a great financial risk if he is disabled for an extended period of time, as a single person generates all of the practice’s income. In engineering language, the sole implementer is the only point of failure in the business. If the probability of an extended disability is one in four, then the financial risk of the application is the same. A business owner in this situation might ask, “Is this financial risk something I’m willing to take on without a mitigation plan?” he should ask. Let’s look at this from another angle. If you had a 25% chance of losing everything, would you take a big financial risk?
The BOE typically covers recurring expenses incurred by your business or practice. These are expenses that keep your business running and unable to provide a stream of income even if you have a disability. Typically, BOE insurance covers up to two years of disability and can have qualifying periods of 30, 60 or 90 days, depending on how much reserves the business owner has and the premium he can pay.
The BOE normally covers most expenses incurred by businesses, but only pays actual expenses up to the policy’s monthly earnings maximum. Typical costs covered by the BOE include:
- Interest payments on some commercial debts
- Employee salaries and payroll taxes
- Postal and stationery
- Equipment maintenance
- Rental, rental or depreciation of office equipment
- Taxes at the location of the business property
- Workers’ Compensation, employee health and liability insurance premiums
- accounting fees
- Professional memberships and subscriptions.
As important as all this is, I think the ability to pay your employees salaries and benefits is a business owner’s priority. Not being able to pay salaries, whether for one or a few, makes your staff unable to pay for themselves and forces them to seek new employment. And when the business owner returns from convalescence, he now faces the overhead of hiring and training new staff. This alone adds to the expense and can result in lost revenue during the acceleration period. Additionally, business owners feel a sense of obligation to protect their employees from unforeseen situations: If they are unable to do so, they feel that they are not fulfilling an implicit moral agreement with themselves.
BOE’s tax results are also quite interesting. Premiums are generally considered a tax-deductible business expense, and any benefits are considered taxable income. However, because the business expenses covered are generally tax-deductible, they are deductible from the benefits paid at the time of filing. Because the benefit only covers actual expenses, business expense deductions should result in zero net income to the business with no tax liability during that time. An accountant should be consulted for more details on this topic.
BOE premiums are calculated based on the same underwriting criteria as any disability policy: age, occupation, and health of the insured. It should be noted that there are instances where an insurance company is unable to top up a BOE policy due to negative ratings from any of these factors or a combination of them, so there is no guarantee that the policy will be issued. Many insurance agents write policies with more than one company, so they should be able to purchase the best alternative for their clients.
There is another important point to consider. If a business is a small partnership, it is important to consider writing BOE policies to all partners, as the loss of any of the partners will have a dramatic impact on the organization’s revenue stream in their absence. Policy benefits can be adjusted to reflect the impact of the loss of one partner or the simultaneous injury of more than one partner.
The BOE is an extremely important part of a business’s contingency planning. It helps reduce the risk of business income being cut due to the incompetence of the owner or owners and allows for the payment of operating expenses during this time. It also protects the interests of employees by ensuring that they can pay their salaries and benefits when there is no business income. Finally, premiums are tax deductible, which can reduce the business’s tax liability. Most importantly, the BOE provides an enormous level of emotional security to business owners, who are often just weeks away from not having the money to keep their business in the event of a disability.