Overhead Insurance Products
The Purpose of Overhead Insurance
The purpose of Overhead insurance - also known as Business Overhead Expense (BOE) insurance - is to pay for business overhead when a producing owner isn't working due to illness or injury. Overhead insurance is a type of disability insurance exclusively for business use rather than personal income protection; as such, premiums are tax deductible as an ordinary business expense even for pass-through entities. (IRS Pub. 334)
Typical purchasers are small businesses, usually consisting of one to four owners, where the owner(s) are individually performing the service that generates revenue in a small office environment. For example:
Attorneys
Architects
Accountants
Cardiologists
Financial Planners
Dentists
Dermatologists
Mediators/ Arbitrators
Opthalmologists
Orthodontists
Pediatricians
Physicians (of all kinds)
...and more
5 Advantages of Overhead Insurance
1. Keep the Business Intact Without Using Personal Assets
Without BOE coverage, business owners may be tempted to use personal assets to keep the business afloat because
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the owner needs more time to negotiate the sale of the business
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it is uncertain when and whether full medical recovery will happen
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business partners are obligated to pull their own weight
BOE insurance prevents financial hemorrhaging and buys time to restore normalcy.
2. Better Lease and Credit Terms
For the same reason Small Business Administration loans require life insurance, disability risk is important for lenders and landlords because long term disability is at least three times more likely than death. BOE insurance can reduce risk, which can be attractive for boutique lenders, community banks, and smaller commercial property investors that take pride in their ability to get creative in making a deal come together.
3. Get Fair Market Value If You Have to Sell
If the medical outlook is not improving, you may decide to sell your business to partners or an outside party. But at what price? If your assets are draining fast, you may be forced to take a deep discount. What you'll need is time to negotiate for fair market value, which BOE can provide by covering the expenses.
4. So That Your Partner's Health Problem Doesn't Become Your Financial Problem
If you have business partners, who pays the disabled partner's share of the business overhead? No business can afford to carry an unproductive member indefinitely. Even if partners agree in advance to pull their own weight, once a partner is actually disabled, the magnitude of financial burden on the non-working partner can blow up the plan. Remember, your non-working partner will also need to cover their usual personal overhead and take care of their family. Who do you think comes first?
5. Keep Employees From Jumping Ship
With no money coming in the door and the producer's prognosis uncertain, what will staff do? Only with overhead insurance keeping salaries funded will nerves be calmed. This can matter a great deal if the practice is to be sold as a result of a health problem because potential buyers will want to see that the practice is a stable, going concern. Or, if recovery is in the cards, BOE insurance benefits can help see to it that you still have an intact practice to come back to.
The Probability of Disability is 30%
According to Milliman, an actuarial consultancy, the career risk of disability for longer than 90 days is 30%. However the perceived risk is only 2%, according to the Council for Disability Awareness, which is a gross underestimation.
This is probable enough that if it does happen, one might regard the absence of coverage as an oversight.
What Overhead Insurance Covers
Overhead insurance covers monthly expenses that are ordinary and necessary for the operation of the business. Examples include employee salaries, equipment lease payments, rent, utilities, insurance, taxes and office supplies. Professional labor substitution is also commonly covered. Personal earnings are not covered, and are left up to a different kind of policy (Group LTD or Individual DI) that usually exists in tandem.
Here's an excerpt from one policy:
COVERED OVERHEAD EXPENSES -- means Your share, based on Your percentage of ownership or contractual agreement, of the usual and customary monthly Business expenses You are responsible for in the operation of the Business. Covered Overhead Expenses must be deductible by the Business for Federal Income Tax purposes and each expense cannot exceed what it was in the 12 consecutive months just prior to Disability. Expenses will be considered when recorded using Your accounting method (cash versus accrual), and those expenses paid other than monthly are considered on a pro rata basis as if paid monthly.
Covered Overhead Expenses include, but are not limited to:
1. Lease or principal and interest payments for space which You occupy and use in the operation of the Business for which You were obligated to make payments prior to Disability.
2. Premiums for Your medical, malpractice, property and liability insurance.
3. Utilities and telephone.
4. Accounting, billing, legal and collection fees.
5. Janitorial, security and maintenance services.
6. Professional and trade dues and subscriptions.
7. Leasing costs or principal and interest payments on loans for furniture and equipment used in the operation of the Business for which You were obligated to make payments prior to Disability.
8. Employee salaries and benefits which are not excluded by number 1 in the list below.
9. Miscellaneous office supplies and postage.
10. Business real estate taxes.
Covered Overhead Expenses also include Your Replacement’s Salary. The compensation paid to Your Replacement must be reasonable in relation to the duties performed.
The following are not considered Covered Overhead Expenses:
1. Salaries, wages, fees, drawing accounts, advances, bonuses, and other compensation, including benefits and pension and profit sharing contributions, for:
a) You,
b) Any other owner of the Business,
c) Any person sharing Business expenses with You,
d) Any person responsible for the generation of income in the Business, not including Your Replacement, and
e) Any person related to You by blood or marriage who was not a full time paid employee, working at least 30 hours per week, in the Business for at least 60 days before Your Disability began.
2. Overhead expenses, including business loan payments, which are covered under another policy for Your Disability.
3. The cost of medical/dental supplies, lab fees, x-ray fees and expenses passed on directly to a client.
4. The cost of goods, inventory, merchandise, products and services.
5. Depreciation, insurance premiums waived during Disability or any expense that does not require a cash payment.
6. Any ongoing expenses after the sale of the Business, excluding lease agreements or mortgage payments that are not terminated with the sale of the Business.
7. Any expense You were not liable for in the normal course of the Business prior to a Disability.
source: Principal policy form 789 for generic states (not CA, OH, VT)
The Difference Between Long Term Disability Insurance and Overhead Insurance
Overhead insurance (BOE) is for business protection, whereas Long Term Disability (LTD) insurance is for personal income protection. Overhead insurance benefits can only be spent on business expenses, whereas LTD benefits can be deployed for any personal use. Overhead insurance benefits are characteristically short in duration - typically two (2) years - instead of lasting until age 67.
It is common for business owners who have BOE coverage to also be covered under an LTD policy so that personal earnings are insured.
Eligibility Requirements for Overhead Insurance
The key underwriting consideration with BOE insurance is whether a significant financial loss would actually occur without the producing person. A small firm of three producing practitioners, for example, would clearly financially suffer if even one of them were disabled, while a larger firm of twenty producers may be well insulated except for the expense of the disabled partner's assistant's salary. The underwriting process takes into account the nature of the business, the occupation, the number of producing principals and the number of employees that are doing the same or similar work to generate business revenue.
If the owner does not significantly contribute to the generation of business income through his or her own production efforts, additional underwriting questions may be asked in order to determine financial dependency.
If the producer is a not an owner but is nevertheless a key person, a different type of insurance is used called Key Person Replacement (KPR), which can serve the same purpose but with more latitude on how funds are used.
Individual medical underwriting may or may not be involved, depending on the concentration of risk. In order to waive medical underwriting, some other program such as LTD (for income protection) on more members may be required as part of a package in order to spread the risk.
Cost of Overhead Insurance
Age 30: $60-$100 per month, per $10,000 of monthly benefit
Age 40: $100-$150 per month, per $10,000 of monthly benefit
Age 50: $200-$250 per month, per $10,000 of monthly benefit
These are representative estimates, not the full-range. For standalone coverage, pricing depends on personal risk factors such as occupation, health history, and lifestyle.
Which carrier is selected also makes a difference. Carrier selection decisions are primarily determined by matching up the candidate's risk factors with the carrier's risk appetite.
Once a policy is purchased, costs are stable over time. Most carriers use a level premium structure, meaning that premiums don't increase until the end of the renewability period, which is usually to age 65.
If a future upgrade is made, the favorable pricing of the first layer of coverage is locked in based on original issue age, and a new layer of coverage is added within the same policy at a separate rate based on the then-current age. The new premium after the upgrade then becomes the cost of the two layers combined.
Premiums are Tax Deductible
Overhead disability insurance premiums are tax deductible as an ordinary and necessary business expense for sole proprietors and principals of pass-through entities such as LLC's, S-corporations and Partnerships (source: IRS Publication 334, see Business Expenses\Insurance). As with all tax matters, consult your tax professional regarding your own situation.
In Washington State, agents and brokers are also called "producers."