What is Business Overhead Expense Disability Income Insurance and Who Needs It?

Insurers designed business overhead expense disability insurance with the cash-flow needs of (generally small to medium sized closely-held) business owners in mind. If business owners should become disabled, business overhead expense disability insurance will help them keep their businesses strong by covering the normal, necessary and customary expenses incurred to run their businesses– including such things as mortgage payments or rent, utilities, salaries, taxes, interest on debt, loan payments and more.

There are several tax advantages of overhead expense disability insurance. First, premium payments are tax-deductible as ordinary and necessary business expenses. Also, overhead expense benefits received during a period of disability are taxable upon receipt: however, they are used to pay business-related expenses that are tax-deductible, so the net tax impact is neutral.

Business overhead expense disability insurance is a complicated product, so business owners should take great care to figure out what expenses they need to have covered. Generally, they should not buy overhead expense insurance for their total monthly overhead. For instance, if the business’s monthly overhead is $25,000, the business owner should determine which of these fixed expenses would continue in the event of his disability. Business owners should take time to review their Schedule C’s and/or cash-flow statements to find the expenses that would indeed stop or diminish in the event of the business owner’s disability. To keep the costs within reason, business owners should make sure they only purchase an amount they truly need during a disability. The selling agents and underwriters typically will make recommendations on monthly benefits during the underwriting process.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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