The vast majority of people vastly underestimate the likelihood of having a significant disability that prevents them from working. In fact, the probability that a person will be disabled for three months or more is just over 25%. These odds are significantly increased 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 generally present a higher risk than sedentary ones. However, disability due to illness is generally not career sensitive – for example, cancer doesn’t care if you sit behind a construction work desk.

Fortunately, many people have disability insurance through their employer, so if they were unable to work for an extended period, a portion of their income would be covered, although there are often gaps in this coverage and will be covered in another article. But self-employed entrepreneurs, especially those whose experience is the financial lifeblood of their organization, such as doctors, dentists, lawyers, consultants, have two problems if they are disabled: one, to replace their lost income while they cannot work, and second, to maintain their viable business during its recovery. This is the second topic that I will cover in this article, as it is rarely addressed by financial advisers and insurance agents. The type of insurance that helps maintain a business while the main income generator is convalescing is called Disability Insurance (DI) for General Business Expenses (BOE) or Business Expense Insurance (BEI). For the sake of brevity, I’ll use BOE, as this is the most common initialism in the industry.

Sole proprietors and small groups of professionals are especially susceptible to partial or full loss of income when the primary income generator is unable to work for an extended period. For example, a physician or dentist who is an individual physician has a large financial exposure in the event that he / she is disabled for an extended period, as that individual person generates the income for the entire practice. In engineering parlance, the single professional is a single point of failure in the business. If the probability of long-term 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 himself, “Is this financial exposure something I am willing to take on without a risk mitigation plan?” Let’s look at this in 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 generate an income stream. Typically, BOE insurance covers a maximum of two years of disability and can have elimination periods of 30 to 60 or 90 days, depending on how much reservation the business owner has and how much premium they can afford.

BOE covers many of the expenses that companies normally incur, but only pays for actual expenses, up to the maximum monthly benefit amount of the policy. The expenses normally covered by BOE include:

  • Rent
  • Interest payments on some business debts
  • Utilities
  • Employee wages and payroll taxes
  • Post office and stationery
  • Maintenance team
  • Rental, leasing or depreciation of office equipment
  • Taxes on the location of commercial property
  • Insurance premiums for workers’ compensation, employee medical expenses and liability
  • Accounting fees
  • Professional memberships and subscriptions.

As important as all of these are, I consider the ability to pay salaries and benefits to your employees to be a top priority for business owners. The inability to pay wages leaves your staff, be it one or more 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 start-up time. In addition, business owners feel an obligation to protect their employees from unforeseen circumstances: if they cannot, they feel that they have not fulfilled an implicit moral agreement with them.

The BOE’s tax consequences are also quite interesting. Premiums are generally considered a tax deductible business expense, and profits are treated as taxable income. However, because covered business expenses are often tax deductible, they can be subtracted from the benefits paid upon filing. Since the benefit only covers actual expenses, the business expense deductions should result in zero net income for the business during this time, with no taxes owed. An accountant should be consulted for more details related to this topic.

Premiums for BOE 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 one or a combination of these factors, so there is no guarantee that a policy will be issued. Many insurance agents write policies with several companies, so they should be able to find the best alternative for their client.

There is one more important point to consider. If a company is a small partnership, it is important to consider writing BOE policies for all partners, as the loss of any one of them will have a dramatic impact on the revenue stream of the organization during their absence. Policy benefits can be adjusted to reflect the impact of the loss of one 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 of business income being disrupted due to the incapacity of the owner or owners, 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. Lastly, the premiums are tax deductible, which can reduce the company’s tax liability. Most importantly, 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.