Business overhead expense insurance.
Business overhead expense insurance is designed to provide funds to cover overhead expenses during a business owner's disability. Business overhead expense insurance is intended to help maintain the business; it is not intended to replace disability income insurance (see chart, page 259) or disability buy-out insurance (see discussion, page 403).
Covered expenses include those that are tax deductible to the business. Typically these expenses include employee salaries, utilities, professional fees, rent, mortgage payments, lease payments for furniture and equipment, premiums for health, property and liability insurance, laundry services, janitorial services, and maintenance services. Not included are the insured's salary, salaries of co-workers who perform the same duties as the insured, salaries of family members, and depreciation.
Monthly benefits are paid upon the insured's total and continuous disability, and are limited to a maximum amount. Partial disability benefits are also available. During disability a "carry-forward" provision allows unused benefits to be carried forward from month to month. Extension of the benefit period allows unused benefits to be received beyond the original benefit period.
Waiting periods are typically either 30, 60, or 90 days. The cash flow requirements of the business are considered when selecting an appropriate waiting period.
Benefit periods are typically limited to 12, 18, or 24 months. Limited benefit periods assume that the insured will dispose of the business interest if disability lasts longer then the benefit period (see disability buy-out insurance, page 403).
Optional coverages are often similar to individual disability income policies (e.g., partial disability riders, guaranteed insurability riders, and lump-sum survivor benefits). Other optional coverages are unique to business overhead expense insurance (e.g., a professional replacement rider covering the cost of hiring someone to perform the insured's duties).
Eligible businesses include regular C corporations, S corporations, limited liability companies, partnerships, and sole proprietorships. The business must have been in operation for a minimum period of time (e.g., 3 years). The business cannot have more than a specific number of owners (e.g., 5 professionals working in the business). This requirement recognizes that a substantial loss of revenue is less likely if the business has a large number of owner-employees. There are specific issue ages and medical underwriting requirements; and the insured must be actively at work full time (e.g., a minimum of 30 hours per week).
Premiums are deductible as a business expense. Although the proceeds are taxable, they are used for tax-deductible business expenses (i.e., taxable proceeds are offset by deductible business expenses).