As long as the owner can perform the essential
daily tasks necessary to operate the business, the business has
a chance to continue and thrive.
But what happens if the business owner becomes
disabled and is unable to perform vital functions necessary to
operate the business? It can happen. In fact, recent statistics
show that one out of three Americans suffers a long-term disability
– one lasting more than 90 days – at some point before retirement.
You can cover yourself with disability income
insurance, but that won’t cover the costs of running the business.
And without financial support, the business may falter and possibly
fail during an owner’s extended disability period.
So how do you protect yourself and your business?
Business Overhead Expense Coverage
Fortunately, with some prudent planning, a
business owner can protect financial interests and the business.
One way to do this is to purchase business overhead-expense (BOE)
coverage, which is designed to reimburse the owner or partner
for the ongoing expenses associated with running a business.
As the name implies, BOE coverage pays for
typical overhead expenses, such as utilities, rent, office supplies,
employee wages and fringe benefits, leased equipment, premiums
for business and professional insurance, and interest on debts
and other fixed expenses considered deductible by the Internal
Monthly benefits are paid for the reimbursement
of actual expenses, up to the limits specified in the policy.
Typically, BOE coverage may pay from $1,000 to $15,000 a month.
In any given month, expenses could be more or less than the actual
monthly benefits of the issued policy. If expenses are less, the
unused amount is carried forward to be used in future months;
if expenses are greater, only the maximum monthly benefit, including
any unused amount previously carried forward, is paid.
BOE policies receive favorable tax treatment;
the premiums are tax deductible since the coverage is considered
a necessary business expense. Because those overhead expenses
paid through BOE coverage are also tax deductible, the net effect
is nontaxable premiums and benefits.
The premiums of BOE coverage vary widely,
depending on many variables, including the amount of coverage,
the length of the waiting period, the duration of the benefit
period and the amount of coverage selected. Typically, BOE policies
can be written so coverage begins after 30, 60 or 90 days, and
benefits can last up to two years.
Who Should Have It?
BOE insurance can benefit various types of
business owners and professionals, including (but not limited
to) sole proprietors, owners of partnerships and owners of service
companies. Sole proprietors, including doctors and dentists, often
have many ongoing expenses associated with their businesses –
including specially equipped offices and a professional staff
– so overhead coverage may be especially useful for them.
BOE coverage is also important to professional
service companies that are heavily dependent on the ability and
reputation of the owner for continued success. If the owner of
a repair facility, for example, is disabled for an extended period,
he may have to make a special effort to keep from losing customers.
A temporary replacement may have to be brought in, and special
effort may be necessary to keep both staff and existing customers
in place throughout the owner’s recovery period. Unless the business
owner is protected until the time he’s ready to return to work,
he may find that he has to rebuild the entire business.
Partnerships also have a particular need for
BOE coverage since one partner’s disability can have a significant
impact on another’s income. During a period of disability, expenses
and, hopefully, profits continue, and the disabled professional
will expect to receive a share of the profits. BOE coverage can
help the firm continue to operate without draining its funds.
The Ugly Alternative
While professionals who plan ahead can protect
their businesses in case of a disability, those who fail to do
so are often confronted with far
less attractive alternatives. These include:
- Hiring a replacement, which could place a financial strain
on the business;
- Using personal funds, which may work as a short-term solution,
but not as a viable long-term tactic;
- Selling the business, which, since the sale is forced, may
not bring the market value of the business; and
- Closing the business, which would result not only in a loss
of earnings, but in the loss of something the owner often works
a lifetime to build.
Protecting the health of a business today and for the next generation
can be complicated. Fortunately, many options exist that can be
tailored to the individual needs of the business and the business
owner. Owners should consult with their lawyers, accountants and
financial planners to determine the best course of action for
their – and their businesses – long-term success.
Information for this article was provided courtesy of the Automotive
Industry Advisory Council (AIAC), a comprehensive resource organization
for owners of independent and franchise service stations, collision
repair shops, auto parts dealers, related businesses and their
membership organizations. To learn more about the services of
the AIAC, call (800) 227-1159.
Check It Out
What happens if a business owner becomes disabled and is unable
to perform vital functions necessary to operate the business?
One way to protect financial interests – and the business – is
to purchase business overhead-expense (BOE) coverage.
- BOE coverage is designed to reimburse the owner or partner
for the ongoing expenses associated with running a business.
- Monthly benefits are paid for the reimbursement of actual
expenses, up to the limits specified in the policy.
- BOE policies receive favorable tax treatment – the premiums
are tax deductible since the coverage is considered a necessary
- The premiums of BOE coverage vary widely, depending on many
variables, including the amount of coverage, the length of the
waiting period, the duration of the benefit period and the amount
of coverage selected.
and professionals, including (but not limited to) sole proprietors,
owners of partnerships and owners of service companies.