11.4.3 Business Continuation Plans
These plans allow a company to continue if an owner or a key employee dies and are versatile enough to be custom-tailored to the business' specific needs.
Business Overhead Expense Insurance
Business overhead expense (B.O.E.) insurance is designed to keep a business going when the owner is disabled. This type of insurance is sold on an individual basis to professionals in private practice, some self-employed business persons, partners, and sometimes to close corporations.
Business health insurance and disability insurance indemnifies the business by providing funds to replace an owner or key employee's income and for securing an experienced, competent successor or replacement.
Business overhead expense insurance provides payments for such things as:
- employee salaries;
- mortgage or rent;
- company-owned autos and auto insurance;
- utilities;
- property and liability insurance premiums; and
- leased equipment.
Mr. Smith is insured under a business overhead expense policy that pays maximum monthly benefits of $3,000. Mr. Smith becomes disabled. His actual monthly expenses are $3,700. The monthly benefit payable under his policy will be how much?
Answer: $3,000. Business overhead expense insurance reimburses businesses for the covered expenses incurred or the maximum that is stated in the policy. If Mr. Smith's monthly expenses were $2,700, his plan would have paid a monthly benefit of $2,700. However, because Mr. Smith's expenses exceeded his maximum coverage, the policy pays the maximum benefit stated in the policy - $3,000.
A business overhead expense policy is considered a valued policy as it will have a maximum total benefit amount. It does not include any compensation for the disabled owner, but rather provides funds to cover fixed overhead costs.
The policy funds are provided to the company, not to the disabled owner. Overhead expenses include all the expenses that would continue and must be paid, regardless of the owner's disability. Business overhead expense policies do not include any compensation for the disabled owner; they are designed to help the day-to-day operation of the business continue during the period of disability.
Business overhead expense insurance premiums are tax deductible - Benefits are taxable as income.
Disability Buy-Outs
Disability buy-out agreements allow for the sale of a disabled partner's or owner's interest in the business and are funded through a disability income policy. However, the buy-out plan can be structured to pay a lump sum payment rather than periodic payments. A lengthy elimination period is a basic characteristic of the buy-out agreement (often as long as two years) to establish the fact that the disabled person will not be returning to the company.
