In 2019, Metro Commercial Plumbing had its best financial year ever. Owner Art Evans had built the business from the ground up, and the company had moved into a larger space to accommodate the growing number of employees and trucks he had added. The business never looked better.
Art believed 2020 was going to be an even better year for Metro — then COVID hit. During the first three months of the pandemic, he was able to retain all of his employees, even though business was down substantially.
Unfortunately, Art contracted a severe case of COVID, was hospitalized, and placed on a ventilator for several weeks. As a result, he suffered lung damage and was confirmed to be disabled by his doctor.
Art had worked with his insurance agent and put a personal disability income insurance policy into place to replace the bulk of his personal income. He was able to meet all of his personal financial obligations.
It was a different story for his business. Within three months, the company was unable to meet its entire payroll, and Art had to lay off the majority of his employees. After six months, Metro failed to make its lease payment, as well as utilities and other expenses, forcing Art to close the business.
It’s a sad, but not uncommon, story in 2020-2021. According to The Wall Street Journal, 200,000 more businesses shut their doors than was normal, largely due to the pandemic. Unfortunately, many companies' stories mirror Art’s: a steep decline in business and ultimately closing their doors because they couldn’t meet their monthly expenses.
Art was wise to have protected his personal income, but he didn’t put a plan into place to pay Metro’s payroll and expenses if he became ill and couldn’t run his business. Unfortunately, many other companies met the same fate because of not having insurance in place to protect the business — business overhead expense (BOE) disability insurance.
Through group disability insurance, Art and some of the other businesses had made arrangements to pay their employees if the employee couldn’t work but didn’t consider that the premiums couldn’t be paid if they, as a business owner, couldn’t work. BOE insurance would have stepped in and kept the business going by paying for many things, like:
- Contributions for employee benefits
- Office expenses: utilities, equipment, and more
- Dues and fees
- Debts: payment for accounting, billing, and collection services
- Installment payments on existing business debt
- Rent or mortgage and property taxes (if applicable)
- Insurance premiums to cover other insurance (property and liability insurance, employees’ life insurance, and disability insurance)
Many of these employers had done a great job protecting themselves and their employees through group disability, life, and health insurance, but they left the business’s monthly overhead expenses vulnerable.
BOE insurance works in some ways like an individual disability insurance policy but is different in others. These are some commonly asked questions about BOE insurance.
Who can apply for BOE insurance?
Business owners 18-64 years of age are eligible to apply for BOE insurance if they’ve been in business for two years or longer, don’t work from home, and can verify their revenue.
How long is the elimination period before benefits begin?
As the business owner, you select the elimination (waiting) period before the insurer begins payment of benefits. Similar to individual disability insurance, the elimination periods you can choose from are 30, 60, or 90 days. And just like individual coverage, the longer the elimination period, the lower the premium because of the decrease in probability the insurer will have to pay a claim.
How long will benefits be paid?
BOE benefits will last either 18 or 24 months, depending upon which length of benefit period you select or when you have recovered sufficiently to return to work, whichever occurs sooner.
How much will the BOE insurance policy pay?
Similar to the elimination and benefit periods you select, you’ll also choose the maximum monthly dollar amount of the policy. Most policies will pay 100% of the business’ monthly operating expenses up to the maximum.
Some BOE insurance policies also have a “rollover” benefit. For example, if your BOE policy had a monthly benefit of $5,000 and the policy only paid out $4,000 the first month you were eligible, the unpaid $1,000 would then roll over to the following month, giving you the potential to have $6,000 of expenses paid by the insurance company.
What is the policy’s definition of disability?
The insurer will state in the policy its definition of disability. Typically, you must be unable to perform the material responsibilities of your job, not that of one of your employees, and you must be under a doctor’s care for your disability.
For example, a surgeon who broke bones in their hand and was unable to operate would meet the policy’s definition of disability, even though they could perform administrative tasks.
What’s not covered by BOE insurance?
Expenses not covered by your BOE policy include:
- Your personal wages and profit
- Wages and profits of anyone sharing a portion of your business expenses
- Salaries and profits of relatives who had worked for you 60 days or less when you became disabled
- Any additions to your office space, including any renovations or furniture, which were paid for after your disability
Who should buy BOE insurance?
Any business or professional service that would not be able to meet its expenses if the owner couldn’t be there because of injury or sickness should have BOE coverage.
Physicians, attorneys, accountants, and small business owners should all have not only individual disability insurance to protect their income, but also BOE insurance to protect their employees and their business.
- Disability Insurance for Physicians
- Disability Insurance for Attorneys
- Disability Insurance for Accountants
- Disability Insurance for Small Business Owners
Is BOE insurance tax-deductible?
Unlike individual disability insurance, BOE insurance is generally tax-deductible (verify with your accountant). In addition, business expenses you pay with your monthly benefit could also be tax-deductible.
However, the benefits you receive may be taxable as business income if you took a tax deduction on your premiums.
If you’re a business owner, it would be devastating to recover from a disability that kept you out of your office, only to no longer have an office to go to when you were able to come back to work. Protecting your personal income with an individual disability insurance policy is the first step in safeguarding your family against a disability. BOE insurance comes in a close second.
Don’t just protect the goose that lays the golden eggs; protect the farm and the farmer too. Consult with your insurance agent today.
Having grown up in upstate New York, Bob Phillips spent over 15 years in the financial services world and has been making freelance writing contributions to blogs and websites since 2007. He resides in North Texas with his wife and Doberman puppy.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.