No one likes to think about or take the time to plan for the unexpected, like a serious illness—or worse. According to the Social Security Administration, there’s a one in four chance that a 20-year-old will, at some point during his career, become too ill or injured to work.
Most of us have life insurance and/or disability plans designed to replace part of our income should we fall ill, become disabled, and be unable to work for an extended period.
But while replacing part of your salary can help alleviate the pressure of mounting bills, what happens to any ongoing expenses associated with your business? All business owners across any sector, including commercial real estate, should have another type of insurance policy: a Business Overhead Expense (BOE) policy.
If you can’t work, your ability to provide the services your clients or customers need. Revenue will likely drop — but you’re still responsible for all those overhead expenses, like rent or mortgage payments, utility bills, insurance premiums, employee salaries and more. BOE insurance helps cover these critical operating expenses for up to two years after you’ve become disabled.
Your revenue may decrease during your recovery, but BOE helps your business stay afloat when you heal, by covering normal and regular fixed monthly expenses and providing financial protection.
An important caveat to this specific insurance: It covers only fixed business expenses, not the cost of anything above and beyond basic operational overhead. It won’t cover the cost, for example, of purchasing new equipment or inventory or making property improvements.
But if your business would suffer financially without your presence, a BOE policy will reimburse it for reasonable costs incurred as a result of conducting normal business operations.
Total Disability Defined
High quality total disability policies typically define total disability as “the inability to perform the duties of the insured’s occupation in the business.” Depending on the policy, a certain amount of time must pass before you receive benefits, usually 30, 60, or 90 days. Once the waiting period ends, you receive benefits for the length of time — 12, 18, or 24 months — in your specific policy.
Policies generally don’t offer paid benefits beyond 24 months, the assumption being that if you’ve not returned to work within two years, it’s likely that your disability has become permanent.
All overhead expense policies carry a maximum paid benefit amount, relative to the number of months it’s paid. Typically, the longer the benefit period, the lower each monthly payment. For example, a 12-month benefit period may pay a maximum amount of $50K per month, an 18-month period may pay a maximum of $40K monthly, and a 24-month benefit period may issue a maximum $30K per month.
Tax Consequences of Using the Benefits
If you need to use your overhead expense policy, talk to your tax and legal advisors. They’re best equipped to advise on the specific tax consequences for your unique situation. Generally speaking, however, you can deduct the premiums you pay for a business overhead insurance policy as a business expense. The benefit payments themselves are taxable — but you’re using them to pay for overhead expenses, which are usually tax-deductible.
Common Reimbursable Business Expenses
While a BOE policy doesn’t reimburse expenses like prepayments or advance payments of a covered overhead expense, income or self-employment taxes, or salaries/fees/benefits or other renumeration for family members, the policy does cover a wide range of operating expenses. They include:
- Accounting and/or legal fees except those directly related to the termination or sale of your business
- Association, professional, and trade dues
- Billing and collections fees
- Depreciation or scheduled installment payments of principal on debt — like a mortgage — and interest payments on debt for which you held responsibility prior to becoming disabled
- Janitorial, laundry and maintenance services
- Liability, malpractice, property, and any other business insurance premiums
- Licensing fees, including continuing education costs required to maintain an up-to-date professional license
- Real estate and property taxes
- Rent or lease payments for your business’s space, equipment, fixtures, motor vehicles, or other assets necessary for business operation, provided you have zero direct or indirect ownership of the assets
- Salaries and employer-paid benefits to employees without an ownership interest in your business
- Utilities like electricity, heat, phones, and water
A BOE policy doesn’t cover your own salary. Make sure you’ve also purchased individual disability income insurance, which will help cover fixed expenses you have at home. Other expenses not covered by this policy include:
- Business expenses covered by an individual other than yourself
- Charitable donations, entertainment, gifts, and meals
- The cost of expenses, fees, and supplies passed onto clients
- Expenses not considered standard recurring costs for which you were liable prior to becoming disabled
- Waived or reimbursed expenses, or those reimbursable from another source
Calculating the Right Sized Policy
When you’re calculating which BOE policy makes sense for your business, you’ll need to calculate your overhead expenses either on your own or with the help of a financial professional like your accountant. Determine the percentage of expenses covered by the revenue you, the owner, generate. This amount is the proportion of business costs covered by the policy benefit.
You can often customize your BOE insurance policy with various optional riders including:
- Automatic benefit increases reflecting rising overhead costs over time
- Partial disability benefits, if you’re able to return to work but in limited capacity
- Benefits of someone hired to temporarily replace you
Prepare for the Worst. Hope for the Best.
Chances are, if you’re an entrepreneur, you play a large role in generating revenue. Becoming disabled for an extended amount of time could result in serious financial repercussions to your company.
As a business owner, you’ve taken steps to protect your income. It makes good financial sense — for yourself, your loved ones, your employees, and your business — to also protect the business itself, with a BOE policy. This insurance adds another layer of protection enabling you to cover expenses associated with operating your business should you become disabled.
Are you a commercial real estate investor or looking for a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United: an organization of CRE professionals from 81 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.
Erin Hoffman is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products offered though PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly-owned subsidiary of Guardian. Certified Financial Services, LLC is not an affiliate or subsidiary of PAS or Guardian. The Living Balance Sheet® (LBS) and the LBS logo are service marks of The Guardian Life Insurance Company of America (Guardian), New York, NY. © Copyright 2005-2021 Guardian. CA License #4029326.
Individual disability insurance policy form 4200 underwritten and issued by Berkshire Life Insurance Company of America, (BLICOA) Pittsfield, MA. BLICOA is a wholly owned stock subsidiary of The Guardian Life Insurance Company of America, New York, NY. Product provisions and availability may vary by state. In New York: This policy provides disability insurance only. It does not provide basic hospital, basic medical or major medical insurance as defined by the New York State Insurance Department. For policy form 4200, the expected benefit ratio is 50%. The expected benefit ratio is the portion of future premiums that the company expects to return as benefits, when averaged over all people with this policy form. Guardian® is a registered trademark of The Guardian Life Insurance Company of America. The foregoing information regarding personal, estate, charitable and/or business planning techniques is not intended to be tax, legal or investment advice and is provided for general educational purposes only. Neither Guardian, nor its subsidiaries, agents or employees provide tax or legal advice. You should consult with your tax and legal advisor regarding your individual situation. 2018-71753 (12/23).