Business Overhead Expense Insurance

What expenses are typically covered

A BOE policy, which carriers and professional associations also sell as office overhead expense insurance or business expense insurance, generally covers the fixed costs of keeping the business open. That commonly includes rent or mortgage interest on the business property, payroll and payroll taxes for employees other than the disabled owner, utilities, property and liability insurance premiums, leased equipment payments, accounting and legal fees, and interest on business loans. The policy is a reimbursement contract, not a flat monthly payment. Each month it pays the covered expenses you actually incurred, up to the monthly maximum you bought. The policy the IRS examined in 1955 was written exactly that way: the monthly expenses actually incurred in the operation of the office, up to the limit stated in the contract. What it generally does not cover is the owner's own salary or profit distributions, since those are personal income rather than business overhead. Read the salary clause carefully. The 1955 policy excluded not only the insured's own pay but the pay of any other member of the insured's profession working with them; contracts differ on this point today, so if you employ another professional in your own field, ask before you buy whether their salary counts. Benefit periods on BOE policies are typically much shorter than on personal disability coverage, commonly measured in a limited number of months rather than running to retirement age, since the expectation is that the business either recovers, is sold, or closes within that window. Elimination periods also apply, meaning benefits start after a waiting period following the onset of disability, not immediately.

How BOE is taxed

Premiums for business overhead expense insurance are deductible as a business expense, and the benefits are taxable income. That is not an industry rule of thumb; it is the holding of IRS Revenue Ruling 55-264, issued in 1955, which considered exactly this kind of policy, one that reimburses a professional for office overhead during a prolonged disability. The ruling held that the premiums are business expenses deductible under section 162 and that any proceeds are includible in gross income under section 61. The IRS's current small business tax guide, Publication 334, still lists overhead insurance among the deductible business insurance costs. Because the benefits are spent on rent, payroll and the other deductible costs they exist to pay, the arrangement usually comes close to a wash from a tax standpoint. This is a different pattern than personal disability income insurance, where premiums are typically paid with after tax dollars and the benefits are then generally received tax free. Tax treatment depends on how your policy and business are structured, so confirm the specifics with your own tax professional before assuming how a claim would be taxed.

Who typically needs this coverage

BOE insurance is built for owner dependent practices and small firms where the business cannot bill without the owner physically or professionally present. Dentists, physicians, chiropractors, optometrists, veterinarians, attorneys, accountants, and other solo or small group professionals are the most common buyers. The test is straightforward: if your revenue would stop or drop sharply the day you became unable to work, and your rent, payroll, and other fixed costs would keep coming due regardless, business overhead expense insurance belongs on your list. Businesses with several income producing partners or employees who can carry the workload during an owner's absence have less need for it, since the revenue disruption is smaller.

Sizing your coverage and working with Lara

The starting point for sizing a BOE policy is your actual books. Add up the real monthly covered overhead, rent, payroll for non owner staff, utilities, insurance premiums, equipment leases, and loan interest, and that total becomes the basis for the monthly benefit you shop for. Lara Goulson compares BOE policies across carriers at no cost to you, since she is compensated by the carriers rather than by client fees. She is licensed in all 11 states she serves and meets with business owners by phone and video, so scheduling around a busy practice is not a barrier to getting this covered.

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