Business Overhead Expense Insurance

Since the owner is often the heart and soul of a small business, the business could be in jeopardy if the owner becomes disabled for any length of time. Business overhead expense insurance is designed to provide funds to recover certain operational expenses in the event of that kind of disability. If properly funded, the insurance policy should provide sufficient income to allow the business to continue during the owner’s disability.

Small businesses usually purchase policies with relatively short benefit periods, such as 12 or 24 months. These policies are designed to buy time until the owner recovers. If an owner is permanently disabled, or even disabled for a longer period of time, the company probably will be sold or dissolved since it would be difficult to continue indefinitely without the person who has been the driving force behind the business. For that reason, business overhead insurance is especially appropriate for small business owners or for those with their own technical practices, such as physicians, attorneys, and accountants.

How does business overhead expense insurance work?

Business overhead expense insurance is a reimbursable contract that pays benefits only after expenses have been incurred. In most cases, the insurance company does not pay a consistent benefit because actual expenses fluctuate. Benefit payments are usually paid monthly up to the limit stated in the policy. Policies can be written for monthly benefit amounts up to a stated insurance company limit. If monthly expenses exceed that limit, there are other ways to help cover expenses.

If a business owner, or principal, does become disabled, benefits become payable after the short elimination, or waiting, period, usually 60 or 90 days, which was selected at the time of application. Benefits are then paid based on the amount of covered expenses incurred in the previous month, subject to the policy maximum.

The IRS considers premium payments for business overhead expense insurance to be tax-deductible business expenses, though the insurance benefits received are considered income. But, once the ordinary expenses are paid with the insurance benefits, they, too, become deductible business expenses.

Expenses covered under a business overhead expense insurance policy

Typical expenses covered by a business overhead expense insurance policy include:

• Utilities
  
• Leased equipment
  
• Office supplies
  
• Salaries of non-owner, non-family employees
  
• Normal rent, lease and, possibly, mortgage payments
  
• Insurance premiums, including property, liability and malpractice insurance
  
• Legal and accounting fees
  
• Business taxes
  
• Furniture and other business equipment costs

Expenses NOT covered under a business overhead expense policy

Expenses not covered may include:

• Salaries of the business owners
  
• Salaries of anyone hired to replace the insured person
  
• Salaries of individuals employed in the business who do the same type of work as the insured person (e.g., a fellow doctor, attorney or accountant)
  
• Salaries of family members who were not working in the business prior to the insured person’s disability

What is covered and what is not covered may vary according to the way a policy is written.