In our first article about business expense protection, we discussed the odds of a business owner becoming disabled at some point in his or her career. We also talked about typical business overhead expenses and the potential funding sources that can be used to pay for these expenses while the owner is disabled. We also covered three scenarios that impact the future of a given business. Finally, we introduced the concept of business overhead expense protection as the sole means of providing reliable funding for the business as the owner recovers from a disability.
Business Overhead Expense Protection Explained
Business owners may opt to purchase a business overhead expense protection policy. This is a type of insurance product available from many business-oriented insurers. This method of protection is the only reliable source of funds to pay for overhead expenses, especially as compared to the alternatives of draining business and personal savings accounts, conducting a forced liquidation of the business, or taking out a loan.
There are significant advantages associated with this type of business insurance. After purchasing such a policy, the business owner can pay overhead expenses during the recovery period from a short-term disability. This can ensure that when recovery is complete, the business will still be a going concern and can resume its operation when the owner returns.
In addition to providing a reliable means of paying for overhead expenses when the owner becomes disabled, this insurance protection can also accomplish:
- Funds exactly when they are needed, because payment is guaranteed by the policy.
- Premiums associated with the policy are generally considered tax-deductible business expenses.
- The business’s assets, as well as personal assets held by the company owner, are protected from a forced liquidation scenario.
- Proceeds from the policy are taxable, but these taxes are offset by business expense deductions when funds are used to pay actual business overhead costs.
- Any personal savings and personal disability benefits are preserved, remaining to cover the financial needs of the owner and family members.
- The policy buys time to organize and conduct a liquidation or sale of the business, particularly when the disability is permanent.
In simple terms, business overhead expense protection insurance is a relatively affordable and efficient means of providing funds needed to keep the company running, covering expenses like rent, salaries, utility costs, and mortgages, only to name a few of the many overhead expenses a typical business faces.
How Does a Business Overhead Expense Protection Policy Work?
To understand a business overhead expense policy, it is useful to know its makeup and how it is configured. The owner of the business is insured by the policy, which is in turn owned by the owner or the business. For sole proprietorships, the owner is the policy owner as well. In businesses that are arranged as corporations or partnerships, the business itself is listed as the policy owner. Premiums paid to the policy are paid by the policy owner (individual or business). If the business owner becomes disabled as defined in the specific language of the insurance policy, the benefits are paid directly to the policy owner (the beneficiary of the policy).
If the owner becomes disabled, benefits covering all taxable business overhead expenses are paid to the policy owner. In general, these insurance policies provide coverage for up to two years of disability, which typically gives the business owner sufficient time to recover and to return to operation. If the disability is longer than the term in the policy, this two-year coverage window is usually sufficient for the owner to arrange an orderly and equitable business liquidation or sale. So, in other words, such a policy covers overhead expenses and buys the time needed to recover without rushing into a situation that may impact the future of the business operation.
As discussed earlier, any overhead expense benefits paid from the policy are reportable as income and are subject to taxation. However, business expenses actually paid by the benefits are eligible for tax deductions. Typically, there will be no additional income tax payable, eliminating the tax burden on the disabled business owner. The only potential tax implication is if benefits paid by the policy exceed overhead expenses. The overage may need to have tax paid on it as income.
Finally, premiums paid by the policy owner are fully tax deductible. This tax advantage is regardless of the type of business entity, including sole proprietorships, partnerships, LLCs, or corporations.
Final Words on Business Overhead Expense Protection
After evaluating the potential for a business to be impacted by the owner’s short-term or long-term disability, it is clear that there are few easy answers. Business owners face significant odds in becoming disabled for 90 days or longer at some point before they reach the age of 65. Faced with a disability, the business owner and his or her family must scramble to make several very tough decisions; should they sell the business? Liquidate its assets? Try to maintain the business until the owner can return? It can be a difficult and confusing situation for even the savviest business professional.
Business overhead expense protection stands as the logical and economical solution to these difficult situations. As a form of business insurance policy, overhead expense protection insurance allows the business to continue, paying overhead expenses as it goes along and allowing the business owner to recover without the financial worries associated with the company’s operation. Business insurance agencies can help company owners find the right policy to meet their specific needs, regardless of business type.
Geoff Thompson 
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