Business Overhead

While not strictly an executive coverage, nevertheless this disability plan is an important adjunct of the business and business owner in protecting against disability. The policy provides coverage during disability for charges the insured might incur in the operation of the business.

Such expenses will not generally include salary, fees, or other remuneration for the insured, his family, or the partner, now will it cover the cost of goods. Mortgage payments may be covered, depending on the issuing company. Often the Business Overhead Expense policy, in conjunction with individual disability planning, is the reason a business owner has a business to return to.

As a rule, there are certain types of business owners that would qualify for Business Overhead Expense (BOE) plans. These include owners of closely held businesses, owners of small businesses, and professionals in their own practice.

Premiums for BOE plans are generally considered to be deductible from the gross income of the business as an ordinary and necessary expense of doing business. The corollary is, of course, that benefits are taxable when received. This tax treatment extends not only to a corporation but also to a partnership and sole proprietor. The policy must state, however, that the benefits payable are related to business overhead expenses for this tax treatment to apply.

There is no great problem with having the benefits taxable; the benefits will be matched by equal amounts of ordinary and necessary deductions for doing business which are deductible. The income received, then, is a 'wash'.

How long would your business survive if you were temporarily disabled? How would you pay the salaries of your employees and meet your monthly expense obligations? Some statistics would have you believe at least 50% of persons aged 35 will suffer a disability lasting at least 90 days before they attain the age of 65.

When a disability occurs, generally three things are sure to happen to a business owner:

• their regular living expenses will continue to occur;
• business expenses will continue to occur; and,
• at this most inopportune time, the income earned from the business will be severely interrupted.

Business overhead expense (BOE) insurance is designed to reimburse a business for overhead expenses in the event a business owner becomes disabled. This is not the same as personal disability insurance which usually pays benefits to age 65. A business overhead expense policy pays a shorter benefit of one to two years after a waiting (elimination) period. It is generally considered that no business can stay open more than two years if the owner is disabled and the business will either be shut-down or sold.

These policies also work where there is more than one owner. If there is a business partner each partner can take out a policy to accommodate their share of the expenses.

The premiums paid for the business overhead expense insurance is a legitimate, tax-deductible business expense; however, the benefits are treated as taxable income when paid.

Generally, there are two conditions which must be met to trigger the payment of benefits:

• total disability due to injury or sickness must be present and
• the expenses covered by the policy must be incurred during the disability.

Typically, eligible business overhead expenses are:

• employee salaries
• employment taxes
• employee benefit costs
• rental payments for property and equipment
• principal and interest on mortgaged business property
• utilities
• accounting and legal fees
• business insurance expenses
• interest on business debts
• property taxes
• general office supplies

Any agreements and insurance polices within a business must be integrated with the overall plan and objectives of the business. Careful consideration must be given to the selection of the plan which is right for your business and to the method of funding your plan.