Business Overhead Expense: Use It To Enter The Small Business Market

While individual disability insurance is a must in protecting ones personal financial security, business overhead expense (BOE) insurance is one of the most important types of coverage a business owner can have. For producers, it can provide the ideal entry into the small business marketplacea market that can be quite lucrative.

BOE offers several attractive benefits, as shown in the box. Well examine each point here.

Prospecting opportunity. Many small businesses depend on the owner to manage sales, production and general daily responsibilities necessary for business success. These businesses are more susceptible to a major disruption from a disability suffered by the owner than larger businesses. What a small business needs during such a disruption is cash, and a BOE policy is the best source. A disabling illness can keep a business owner from working for weeks or even months. But, thanks to BOE, this does not have to disable his or her business.

There are more than 6.6 million companies in the United States, and more than 50% of those have fewer than 4 employees. In addition, 68% of all small businesses do not carry any disability coverage (Source: U.S. Census Bureau, 1998 Statistical Abstract of U.S.). Many business owners are not aware that this type coverage is available to them, making this a great marketing opportunity.

Maintain value of the business. When visiting business owner clients, ask them to think about what would happen to their business expenses if they became disabled due to accident or illness. Would their utilities stop? What about the leases on their equipment? Creditors dont say, “Sorry to hear youre unable to work. You can wait on making payment until youre back on your feet.”

The point is, without BOE, an owner could be faced with the prospect of having to reduce staff or even sell the business. Years of hard work could be erased in just a few months. BOE can help this from happening by keeping the doors open and avoiding a forced sale, possibly below market value. However, if the owner has BOE and decides to sell later, the value is kept higher, resulting in a possible better price.

Provide funds to cover business expenses. The BOE policy is different from the individual disability contract in how the benefits are paid.

The individual disability policy pays a predetermined monthly benefit based on certain income levels.

By contrast, BOE is strictly a reimbursement for incurred expenses. This benefit may vary month to month. For any month during the disability that covered overhead expenses are less than or more than the maximum monthly benefit, the difference may be carried forward to the coming month and then applied to actual covered overhead expenses for that month. Elimination periods available are typically 30, 60 or 90 days, and benefit periods are 12, 18 or 24 months, allowing enough time for the business owner to make a decision on whether to return to work or to sell the business.

What expenses are covered? Here is a sample:

–Lease or mortgage payments

–Employee salaries (including payroll taxes and contributions for benefits)

–Utilities

–Payments for equipment, furniture and supplies

–Property and liability insurance

–Laundry and maintenance services

–Interest payments on business loans

–Accounting, billing and collection service fees and taxes on business premises owned and used by insureds in the operation of their business.

In addition, it may be necessary for the business owner to hire a replacement to perform duties that he or she normally would have done, had the disability not occurred. Thats where a “salary substitute rider” comes into play. With this rider, the owner can hire a replacement, giving customers a sense of security knowing that someone is in charge until the business owner can return to work.

The goal is to help keep the business as close as possible to pre-disability conditions. BOE, along with a salary substitute rider, can help keep the doors open.

Tax efficient solution. Premiums paid for the BOE policy are tax-deductible. This is true regardless of the type of business. The fact that a sole proprietor or partner can take a deduction for an insurance policy on him/herself is very attractive to a small business owner. If a disability occurs and benefits are paid, these benefits are taxable. But, because the benefits are used to pay business expenses and the expenses are tax deductible, these benefits are net tax-free. This “double tax play” may be the key to the sale.

In sum, agents can use BOE to enter the small business market. By pointing out to the owner the advantages of insuring against the risk of disability, the ensuing discussion may open up a number of profitable opportunities, making not only the BOE sale, but ancillary sales of other business insurance products as well.

Ronald D. Keller is a senior product marketing representative with Union Central Life Insurance, Cincinnati, Ohio. His e-mail is rkeller@unioncentral.com.


Reproduced from National Underwriter Edition, March 4, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.