Business Overhead Expense Insurance

Business overhead expense insurance can ensure your business survives your disability

As a business owner, you can protect your business income by purchasing a business overhead expense insurance policy. The business pays the premiums for the coverage, and you are the insured. If you become disabled, your policy will pay the monthly operating expenses of your business for a certain number of months (usually 12 to 24). This will allow your business to survive until you recover and return to work, or sell your business.

Business overhead expense insurance pays the actual monthly expenses of the business

Business overhead expense insurance is designed to reimburse you, the business owner, for the actual monthly expenses your business incurs. Like an individual disability insurance policy, business overhead insurance will pay you benefits for a certain number of months, or until you recover. However, instead of receiving a fixed monthly benefit, you will receive a different benefit every month, based on your actual monthly overhead expenditures. The policy will pay no benefit at all in a month in which you had no overhead expenses to pay.

Receiving benefits from a business overhead expense policy

To receive benefits under a business overhead expense policy, you must be unable to perform your duties in the business (the own-occupation definition of disability) and satisfy the elimination period (waiting period) outlined in your policy. This period is commonly 30, 60, or 90 days, depending upon the option you selected. Then, the policy will pay your monthly business overhead expenses, up to a certain monthly maximum. This maximum is determined when you buy the policy by looking at what monthly expenses you normally have. In general, you will receive a benefit equal to either the amount of your actual expenses or the amount of your monthly maximum, whichever is less. Some policies will allow you to carry over the difference between your actual expenses and your monthly maximum. If your monthly expenses ever exceed the monthly maximum, you will then have extra funds to offset your extra expenses. Other policies will pay benefits to you past the end of your benefit period until your balance is depleted. Since several methods are used to pay out benefits to the business owner, check the terms of your policy.

Example(s): The maximum monthly benefit payable under Martha’s business overhead expense policy was $3,000. In August, Martha’s actual overhead expenses totaled $2,400. Since her actual expenses were less than her maximum monthly benefit, she received this amount. However, in September, Martha’s monthly overhead expenses totaled $3,150, more than her monthly maximum benefit. In this case, she received $3,000, the amount of her monthly benefit, and the remaining $150 was carried over. In October, the last remaining month of her benefit period, she also received $3,000, her monthly maximum. However, since she still had $150 in her “account,” she received a benefit equal to this amount in November.

Tip: Although some policies require you to be totally disabled before receiving benefits, others use a partial or residual definition of disability as well.

Other policy options and provisions

• Renewability–Most contracts are noncancelable to age 65, which means that the policy premium and coverage is guaranteed and will not change. Some contracts, however, may be guaranteed renewable, which means that the insurance can be renewed as long as the premiums are paid, but that the premium may be increased if the insured is notified at specified times. Coverage, however, will not change.
• Waiver of premium–Once you have been disabled for 90 days (in some cases less if your elimination period is shorter), your insurance premium will be waived as long as you continue to be disabled.
• Options available–A business overhead expense policy may be personalized with certain options and riders. For instance, you may purchase a substitute salary expense benefit rider that will pay you a monthly benefit you can use to offset the salary you pay to a substitute employee. You can also purchase a guarantee of insurability rider that will allow you to purchase additional coverage without undergoing additional medical underwriting. This will cover the likelihood that your business expenses will increase as your business grows. In addition, you can purchase a return of premium rider that will refund part of the policy premium you have paid after a certain amount of time has passed. Other options may also be available.

Example(s): Ken, a sole practitioner dentist, purchased a business overhead expense policy and added a substitute salary expense benefit rider to ensure that if he became disabled, he could afford to hire a dentist who could replace him temporarily until he recovered.

Tip: If you purchase a rider, it will add to the cost of your policy. However, some companies include options in the base portion of the policy, without additional cost to you. Check the policy language carefully.