How will you maintain your business if you are unable to work due to serious injury or illness?

The vast majority of people grossly underestimate the likelihood that they will have a significant disability that prevents them from working. In fact, the chance that a person will be disabled for three months or more is a little over 25%. These chances increase significantly if a person is overweight, smokes, or has existing chronic conditions such as diabetes, high blood pressure, and/or heart disease. It also depends on the occupation: physically demanding jobs are generally more risky than sedentary ones. However, disability due to illness is generally not career-sensitive: for example, cancer doesn’t care if you sit behind a desk working in construction.

Fortunately, many people have disability insurance through their employer, so if they were unable to work for an extended period, a portion of their earnings would be covered, although there are often gaps in this coverage and this will be covered in another article. But self-employed entrepreneurs, especially those whose expertise is the financial lifeblood of their organization, such as doctors, dentists, lawyers, consultants, have two problems if they’re disabled: one, replacing their lost income while they can’t work, and second , keeping your business viable during your recovery. It is this second topic that I will address in this article, as it is rarely addressed by financial advisors and insurance agents. The type of insurance that helps maintain a business while the primary earner is convalescing is called Business Overhead Expense (BOE) Disability Insurance (DI) or Business Expense Insurance (BEI). For the sake of brevity, I will use BOE, as it is the most common acronym in the industry.

Sole proprietors and small groups of professionals are especially susceptible to losing all or part of their income when the primary earner is unable to work for an extended period. For example, a self-employed physician or dentist has a large financial exposure if he is disabled for an extended period, since that one person generates all of the income for the practice. In engineering jargon, the single practitioner is a single point of failure in the business. If the chance of extended disability is one chance in four, then the financial risk to the practice is the same. A business owner in this situation has to ask themselves, “Is this financial exposure something I’m willing to take on without a risk mitigation plan in place?” Let’s look at this another way. Would you take a huge financial risk if you had a 25% chance of losing everything?

BOE generally covers the recurring expenses of your business or practice. These are the expenses that keep your business going even if you are disabled and unable to produce an income stream. BOE insurance typically covers up to two years of disability and may have 30, 60, or 90-day elimination periods, depending on how much reserve the business owner has and how much premium they can afford.

BOE covers many of the expenses that businesses normally incur, but only pays for actual expenses, up to the policy’s maximum monthly benefit amount. Expenses typically covered by the BOE include:

• Rent
• Payment of interest on some commercial debts
• Utilities
• Employee wages and payroll taxes
• Post office and stationery
• maintenance team
• Office equipment rental, lease or depreciation
• Business Property Location Taxes
• Workers’ compensation, employee medical, and liability insurance premiums
• accounting fees
• Memberships and professional subscriptions.

As important as all of these are, I maintain that the ability to pay wages and benefits to your employees is a business owner’s priority. The impossibility of paying salaries leaves your staff – be it one or several people – with no way to cover their own expenses and forces them to look for a new job. And when the business owner returns from convalescence, he now faces the added burden of hiring and training new staff. This alone increases expenses and can result in decreased revenue during ramp-up time. Furthermore, business owners feel an obligation to protect their employees from unforeseen circumstances: if they can’t, they feel they have broken an implicit moral agreement with them.

The fiscal consequences of the BOE are also quite interesting. Premiums are generally considered a tax-deductible business expense, and any benefits are treated as taxable income. However, because covered business expenses are typically tax deductible, they can be subtracted from benefits paid at the time of filing. Since the benefit only covers actual expenses, business expense deductions should result in zero net income for the business during this time, with no taxes due. An accountant should be consulted for further details regarding this matter.

BOE premiums are calculated based on the same underwriting criteria as any disability policy: the insured’s age, occupation and health. Please note that there are situations where an insurance company cannot write a BOE policy due to unfavorable ratings resulting from any or a combination of these factors, so there is no guarantee that a policy can be issued. Many insurance agents write policies with multiple companies, so they should be able to find the best alternative for their client.

There is one more important point to consider. If a business is a small partnership, it is important to consider writing BOE policies for all partners, as the loss of any partner will have a dramatic impact on the organization’s revenue stream during their absence. Policy benefits may be adjusted to reflect the impact of the loss of a member or the simultaneous disability of multiple members.

BOE is an extremely important part of a company’s contingency planning. It helps mitigate the high risk that business income will be interrupted due to the incapacity of the owner(s), and allows business expenses to be paid during this time. It also protects the interests of employees by giving them the ability to pay their salary and benefits if there is no business income. Finally, the premiums are tax deductible, which can reduce the company’s tax liability. Most importantly, the BOE provides a tremendous level of emotional security to business owners who are often only a few weeks away from not having the money to continue their business in the event of a disability.