Part of running a business means planning for curveballs that could make managing day-to-day operations difficult. Business overhead expense insurance is designed to keep things going when a disability or illness requires you to be temporarily absent. This is different from personal disability insurance, which makes payments directly to you to replace lost income if you can’t work. If you own a business, getting familiar with the basics of business overhead expense insurance and how it works can help you decide if it’s a good investment.
What is Business Overhead Expense Insurance?
Business overhead expense insurance (BOE) is a type of insurance that pays benefits to your business if you’re unable to work. For example, if you’re in a car accident and are seriously injured, or you’re diagnosed with a serious illness, your policy’s benefits could kick in to provide the business with cash flow while you recover.
This type of insurance is typically used to help manage your business’s day-to-day expenses. Its purpose is to ensure that your business can continue as usual even when you can’t be there to run it in a hands-on way.
What BOE Insurance Covers
This kind of insurance coverage is business-specific, meaning it applies to expenses related directly to running your business. The types of expenses you can use business overhead expense insurance to pay include:
- Rent or lease payments
- Loan payments
- Insurance premiums
- Utility bills
- Custodial services
- Payroll for employees
- Tax obligations
- Business credit card bills
There are, however, some things that overhead expense insurance is not designed to cover. For instance, these policies don’t extend to expenses related to improving or expanding your business, such as buying new equipment or opening a second location.
Overhead expense insurance also doesn’t cover your salary. For that, you’d need a separate disability insurance policy which would pay you a percentage of your regular earnings. You could then use that money to pay your regular personal expenses, such as mortgage payments, utility bills, medical bills and other debts while you’re not working.
Who Needs BOE Insurance?
It’s worth considering purchasing this type of insurance if you’re the person who’s primarily in charge of running your business. Having an overhead expense insurance policy in place means the bills continue to get paid for the business when a disability or illness puts you on the sidelines.
Depending on the terms of your policy, your insurance company could pay benefits for up to two years after you file an eligible claim. That can be helpful if you have a serious disability, illness or injury that requires extensive rehabilitation or physical therapy.
Keep in mind that not every business owner may qualify for this type of insurance. If you’re self-employed as a freelancer and run a business from home, for example, you may not be able to purchase a policy. You may have to stick with a regular personal disability insurance policy instead.
Pros and Cons of BOE Insurance
There are advantages and disadvantages associated with having this kind of insurance for your business.
Here are some of the key benefits of BOE insurance:
- Your business can remain open even when you can’t be there to run it
- Essential business expenses can be paid for using policy benefits, allowing you to preserve your business’s cash reserves
- Being able to meet payroll means you have a better chance of retaining key employees
- A BOE policy decreases the odds of having to dip into personal savings to cover business spending
- Some policies may pay partial benefits if you’re partially disabled
- Your policy may be guaranteed renewable, meaning it can’t be canceled as long as premiums are paid
- Premiums paid for coverage may be tax-deductible
- Business expenses paid with premiums may also be tax-deductible
In terms of the downsides, here are a few things to keep in mind:
- Policies don’t pay benefits to you directly so you’ll still need separate disability coverage for that
- Benefits typically have a time limit and can’t be paid indefinitely
- Any benefits you receive may be considered taxable income for the business
- Policies may enforce a maximum monthly benefit limit, which may be less than what you need to continue operations
As you can see, the pros generally outweigh the cons but they still need to be factored in. And you also have to consider the potential return on investment for purchasing this kind of coverage. Having it can be a safety net if you get sick or become disabled but if you never end up using your coverage, you may feel as if you’ve paid premiums for nothing.
How to Get BOE Insurance
There are a number of companies that offer this type of insurance coverage. Before you apply, it’s helpful to take a look at your business finances to determine how much coverage you need based on your expenses and overhead costs. You also may need to figure out how much of your business revenue you drive directly through your involvement in the business.
From there, you can do some comparison shopping to decide which insurance company you want to apply for coverage with. Keep in mind that there may be some initial restrictions when it comes to things like age, business structure, industry and minimum revenues on who can apply and be approved.
If you’re initially approved for a policy, you may be able to work with your insurance company to customize your coverage. For example, you could include riders that allow you to receive benefits to cover wages for someone who steps in to run the business on your behalf when you’re disabled or automatically increase your benefit amount over time.
When comparing policies, be sure to check the coverage amounts and premium costs, as well as the cost to add-on riders. The goal should be getting the appropriate amount of coverage at the best price possible to accommodate your business budget.
The Bottom Line
BOE insurance can give you some financial peace of mind if you’re worried about how your business would be able to remain open if you get sick or injured. When purchasing this type of coverage, it’s also helpful to consider getting a separate disability policy to help pay your personal expenses in a worst-case scenario.
Tips for Investing
- Consider talking to a financial advisor who specializes in the meeting the financial planning needs of business owners. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’ve set up a 401(k) plan for yourself and your employees or you have a SIMPLE or SEP IRA, you may consider drawing on those accounts to cover expenses because of a disability. It’s important to remember, however, that doing so can trigger tax penalties and those distributions may be subject to income tax as well. Having a disability insurance policy and a BOE policy can help you avoid having to drain your retirement to cover business or personal expenses in a financial emergency.
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