When creating a business plan, the owner of the company must account for all of the risks associated with the operation. On of the greatest risks is disability. It is said that 50% of persons aged 35 and over will experience some sort of disability before they reach the age of 55. The question a business owner must ask is; can my business survive if I was to become disabled for a period of time? The answer: in most cases the business can not continue on. Business owners must protect their business by purchasing business overhead expense insurance.

Definition
This insurance policy is designed to cover the operating expenses of a business if the owner of the business has become totally or partially (depending on the structure of the policy) disabled. This coverage differs than individual disability in that individual disability covers personal expenses in the event the owner becomes disables. As mentioned, this policy covers the business expenses. The expenses the policy is designed to cover typically include...

  • Payroll (employee)
  • Rent
  • Utilities
  • Taxes
  • Accounting and legal fees
  • Insurance expense
  • Office supplies

Structure
Unlike individual disability most business overhead expense policies have duration of 1 or 2 years. Generally, these policies also carry shorter elimination periods than individual disability. The elimination periods are typically 30 or 90 days. The policy's can also be designed to be noncancelable or guaranteed renewable.
  • Noncancelable - policy is guaranteed renewable until the contract anniversary date and the premiums do not change.
  • Guaranteed Renewable - policy is guaranteed renewable until the contract anniversary date and the premiums may change.

In most cases the policy will reimburse fixed operation expenses. Typically, the insurance company will require the owner to produce supporting financial statements when applying for the policy.

Tax Considerations
As with any other business expense the owner of the business needs to consider the tax consequences of purchasing a policy. The premiums paid by the business to purchase the policy are tax deductible. However, benefits from the policy to cover monthly operating cost are taxable.

Practice Question:
Dr. Jane Jones owns and operates a medical practice. She is the sole owner of the practice and has 3 employees working for her. Dr. Jones sees about 25 patients a week and carries an ongoing operating expense of $30,000 a month. All of the expenses are covered with the cash flow Dr. Jones generates from seeing her patients. She is concerned that if she were to become disabled her business would suffer and she would have to downsize her practice. You have recommended that she purchase business overhead expense insurance. After your recommendation Dr. Jones asks you, if I were to purchase this insurance how much of the premium can I deduct and if I receive benefits from the policy do I have to include that as taxable income for the business?

25% of the premium is deductible; 0% is included as taxable income
75% of the premium is deductible; 100% is included as taxable income
100% of the premium is deductible; 50% is included as taxable income
100% of the premium is deductible; 100% is included as taxable income
0% of the premium is deductible; 0% is included as taxable income

Answer: D
The IRS allows a business to deduct 100% of the premium paid, but if benefits are received from the policy the IRS includes 100% of the benefit as taxable income for the business.


An Introduction to the Insurance Needs Approach

Related Articles
  1. Financial Advisor

    Disability and Business Overhead Coverage for the Self-Employed

    What every small business owner or professional needs to know about individual and business overhead disability income insurance plans.
  2. Managing Wealth

    Tips for Insuring Your Salary

    Those with high incomes really can’t afford to be without disability insurance. Here's why.
  3. Insurance

    The Disability Insurance Policy: Now In English

    Learn to translate this complicated policy so you can rest assured you're covered.
  4. Financial Advisor

    Advising FAs: Explaining Disability Insurance to a Client

    Disability is a very critical type of insurance that most individuals should consider carrying. When it comes to your personal finances, long-term disability can have a devastating effect if ...
  5. Taxes

    Don't Miss These Tax Deductions

    Knowing the tax deductions you're entitled to can make or break your bank account. Do you know about all these insurance-related deductions?
  6. Insurance

    Choosing The Best Disability Insurance

    Social Security benefits can be hard to collect. Find out why you need disability insurance to protect your income, and learn how to choose the right policy for you.
  7. Insurance

    Disability Insurance For Business Owners

    If you become injured and no longer able to work, would your business survive?
  8. Insurance

    Will Insurance Keep Your Business Safe?

    Skilled employees are key to a successful business. Find out how to avoid a financial setback if they leave.
  9. Insurance

    Using Insurance in a Business Succession Plan

    How to use life and disability insurance to help fund a business succession or buyout plan.
  10. Insurance

    Group and Individual Disability Insurance: What You Need to Know

    What you need to know about group and individual disability income coverage.
Trading Center