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. Managing Wealth

    Tips for Insuring Your Salary

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

    The Disability Insurance Policy: Now In English

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

    How to Help Clients Who Have Become Disabled

    Disability can strike a client any time. Advisors should make sure clients are adequately insured against this risk and know what benefits are available.
  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

    Insurance-based Tax Deductions You May Be Missing

    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

    Protecting Your Income With Disability Insurance

    For a high-earning professional, income protection is essential. Here's what to look for in a disability insurance policy.
  7. 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.
  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

    5 Things You Need to Know About Disability Insurance

    It's important to understand the true value of your ability to earn income, and to make sure it's protected.
  10. Insurance

    Tax Incentives for Biz Owners With LTC Insurance

    Tax deductions for long-term care insurance premiums are often overlooked by small business owners.
Frequently Asked Questions
  1. What is a good annual return for a mutual fund?

    Learn the key factors that determine if a mutual fund's return is "good" for you and your needs?
  2. How are industrial goods different from consumer goods?

    Understand the difference between industrial goods and consumer goods, and learn the different types of industrial goods ...
  3. What causes inflation, and does anyone gain from it?

    In this article, we will examine the fundamental factors behind inflation, different types of inflation and who benefits ...
  4. What is the difference between a buy-side analyst and a sell-side analyst?

    The main difference between a buy-side analyst and sell-side analyst is the type of firm that employs them and the people ...
Trading Center