Business overhead expense insurance can ensure your business survives your disability. As a business owner, you can protect your business income by purchasing a business overhead expense insurance policy. The business pays the premiums for the coverage, and you are the insured. If you become disabled, your policy will pay the monthly operating expenses of your business for a certain number of months (usually 12 to 24). This will allow your business to survive until you recover and return to work, or sell your business. Show
Additionally, business overhead expense insurance pays the actual monthly expenses of the business. It is designed to reimburse you, the business owner, for the actual monthly expenses your business incurs. Like an individual disability insurance policy, business overhead insurance will pay you benefits for a certain number of months, or until you recover. However, instead of receiving a fixed monthly benefit, you will receive a different benefit every month, based on your actual monthly overhead expenditures. The policy will pay no benefit at all in a month in which you had no overhead expenses to pay. Receiving Benefits from a Business Overhead Expense Policy To receive benefits under a business overhead expense policy, you must be unable to perform your duties in the business (the own-occupation definition of disability) and satisfy the elimination period (waiting period) outlined in your policy. This period is commonly 30, 60, or 90 days, depending upon the option you selected. Then, the policy will pay your monthly business overhead expenses, up to a certain monthly maximum. This maximum is determined when you buy the policy by looking at what monthly expenses you normally have. In general, you will receive a benefit equal to either the amount of your actual expenses or the amount of your monthly maximum, whichever is less. Some policies will allow you to carry over the difference between your actual expenses and your monthly maximum. If your monthly expenses ever exceed the monthly maximum, you will then have extra funds to offset your extra expenses. Other policies will pay benefits to you past the end of your benefit period until your balance is depleted. Since several methods are used to pay out benefits to the business owner, check the terms of your policy. Example(s): The maximum monthly benefit payable under Martha’s business overhead expense policy was $3,000. In August, Martha’s actual overhead expenses totaled $2,400. Since her actual expenses were less than her maximum monthly benefit, she received this amount. However, in September, Martha’s monthly overhead expenses totaled $3,150, more than her monthly maximum benefit. In this case, she received $3,000, the amount of her monthly benefit, and the remaining $150 was carried over. In October, the last remaining month of her benefit period, she also received $3,000, her monthly maximum. However, since she still had $150 in her “account,” she received a benefit equal to this amount in November. Although some policies require you to be totally disabled before receiving benefits, others use a partial or residual definition of disability as well. For more information, see How Disability Insurance Contracts Define Disability. Other Policy options and provisions Renewability Waiver of Premium Options Available Example(s): Ken, a sole practitioner dentist, purchased a business overhead expense policy and added a substitute salary expense benefit rider to ensure that if he became disabled, he could afford to hire a dentist who could replace him temporarily until he recovered. If you purchase a rider, it will add to the cost of your policy. However, some companies include options in the base portion of the policy, without additional cost to you. Check the policy language carefully. When can it be used? Could your business survive if you could no longer work? Even if your disability only lasted a few months, it’s likely that the financial impact on your business would be great. Although you may have enough money to support yourself (from your savings, perhaps, or from an individual disability income policy), you’ll also need money to pay the expenses of your business. If you are a business owner who works from home, and you have no employees, you may not need to purchase a business overhead expense insurance policy, because your business overhead expenses are likely minimal. However, if you rent or own a building or office space, pay one or more employees, and have to pay utility charges, taxes on business property, and other miscellaneous operating expenses of your business, you may want to purchase a business overhead expense policy. Example(s): When Martha became disabled, her four employees were afraid that she would no longer be able to pay them. However, Martha had purchased a business overhead expense policy that paid her $8,000 per month, the amount she needed to meet payroll. After six months, Martha was back at work, and her company was debt free. Strengths Your business will remain profitable, or debts will be kept to a minimum, if you become disabled. Numerous businesses fail when the owner becomes disabled, because the owner is the driving force behind the business. Without you bringing in business and earning income for the business, it’s quite possible that the business will fail. Even if you are able to return to work after a short period of disability, your business may be so debt-ridden that financial recovery will be difficult, if not impossible. However, if you own a business overhead expense insurance policy, many of the expenses of your business (including your employees’ salaries) will continue to be paid, and your business will remain financially sound. Owning a business overhead expense policy will enable you to take the time to find the right buyer for your business if you decide to sell it. If your temporary disability turns into a permanent one, you may need to sell your business. If you are receiving benefits from a business overhead expense policy, you can keep your business going until you find the right buyer rather than sell your business at a loss, as unprotected business owners are sometimes forced to do. Furthermore, a financially sound business may be easier to sell than one that is financially shaky. Premiums paid are tax deductible to the business. Even though you are the insured, your business usually pays the premiums of a business overhead expense policy, so the premiums can normally be deducted as a business expense. Tradeoffs Since the business receives the benefits from the policy, benefits are treated as taxable income to the business. However, this income is offset in part if the business uses the benefits to pay deductible expenses of the business. Purchasing a Policy Determine Your Need for a
Business Overhead Expense Policy List Your
Monthly Business Overhead Expenses Purchase a Policy from a Reputable
Company Income Tax considerations Premiums Are Deductible as a Business Expense Benefits Are Treated as Taxable Income Common Questions What happens if the insured individual dies while receiving benefits? Can a business overhead expense policy be
converted to a different type of policy? If you have questions or need assistance, contact the Insurance Experts at Henssler Financial: or 770-429-9166. DisclosuresThe following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.What does an overhead expense disability policy cover?Overhead Expense (OE) insurance reimburses a business owner for business expenses incurred during an owner's disability. Covered expenses are those that are deductible for federal income tax purposes, such as replacement salaries, utilities, phone bills, and lease payments.
What type of insurance is sold to small business owners that must meet overhead?Disability overhead expense insurance, also known as business overhead expense insurance, pays a benefit to your business should you — the owner — become disabled and can't work. The business can use the money to meet its day-to-day expenses such as paying salaries and utility bills.
Which of the following is the reimbursement of benefits for the treatment of a beneficiaries injuries caused by third party?Which of the following is the reimbursement of benefits for the treatment of a beneficiary's injuries caused by a third party? The correct answer is "Subrogation". Subrogation is the right for an insurer to pursue a third party that caused an insurance loss to the insured.
Which type of business disability insurance helps the owners purchase the share of a totally disabled partner?Disability Buy-Out (DBO) insurance funds a buy-sell agreement to buy out a totally disabled business owner. This coverage maximizes the financial return when a business is transferred, while minimizing tax liability.
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