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Small business owners purchase personal disability insurance to protect their income if a disability leaves them unable to work. But while that helps pay for personal expenses, it doesn’t cover the ongoing expenses of the business.
You still have fixed business expenses that continue even if you become disabled. Rent for your commercial office, employee salaries, equipment leases, and utilities are just some of the overhead expenses you need to pay to keep the business running.
Without any protection, your business might not have the means to endure a long-term disability.
That’s where business overhead expense insurance can help. It covers your ongoing expenses, so you have a business to return to when you recover from your disability.
What Is Business Overhead Expense Insurance?
Think of business overhead expense insurance as a type of disability insurance. The difference is, while personal disability insurance pays for your personal expenses, business overhead expense insurance pays for your business expenses.
If you can’t work because of an injury or illness, business overhead expense insurance will keep your business running. It covers your fixed business expenses required to keep your business viable until you return to work. For example, business overhead expense insurance will reimburse you for rent, property taxes, utilities, office supplies, and more.
Covering these costs will allow business operations to continue until you either return to work or decide on the future of your business.
Who can get business overhead expense insurance?
Business overhead expense insurance is designed for small businesses where the principals or owners generate the majority, if not all, of the revenue. If an employee can step in and do your job without any impact on the business, you’re not eligible. That’s because you’re not essential to the continuation of the company.
This means you have to be engaged in a business requiring your special services. For that reason, these professionals are especially suitable for business overhead expense insurance:
- Physicians
- Dentists
- Accountants
- Lawyers
- Engineers
In general, small businesses with the same residential and business addresses are not eligible. Therefore, you would need a separate office location to qualify for coverage. This restriction doesn’t apply for low-risk occupations (e.g. accountant, architect, physician).
Other occupations that can’t get business overhead expense insurance include retail sales, farm owners, and restaurant owners.
How much can you get?
The coverage amount is the maximum total benefit payable by the insurance company. But since business overhead expense insurance is a reimbursement-type policy, the insurer won’t pay you more than the actual expenses incurred.
For example, if your coverage amount is $5,000 and your overhead expenses are only $4,000, the maximum amount payable is $4,000. On a positive note, you can carry the unused benefit amount to a future month when your outlay exceeds $5,000.
Carryover also works if your actual expenses exceed your benefit amount. For example, say your benefit amount is $5,000. Your business expenses for the first month are $6,000, so the insurance company will only pay $5,000. However, if overhead expenses drop to $4,000 the next month, $5,000 will be payable because of the carry-over provision.
In general, the minimum monthly benefit you can buy is $200, and the maximum is $40,000.
How long does business overhead expense insurance last?
Business overhead expense insurance pays a monthly benefit for up to 24 months. Shorter benefit periods like 12 and 18 months are also available for your choice. Benefit payments will also stop earlier than your chosen benefit period if you make a speedy recovery from your disability.
What is the elimination period?
The elimination period, also known as the waiting period, is the number of days you have to wait after a disability commences before you start to receive your monthly benefit. The shortest elimination period is 30 days, while you can choose longer ones like 90 days to save on premiums.
If you choose 90 days, keep in mind you won’t receive the benefit until the end of the month. That means your business has to be able to survive 120 days before benefits kick in.
What is the definition of disability?
You have to meet the definition of disability before you become eligible for benefits. Having a total disability means, due to injury or illness:
- You are unable to perform the important duties of your occupation; and
- You are receiving care and treatment by a physician.
Besides total disability, you can also receive partial disability benefits. Instead of being unable to perform all the important duties, you only need to show:
- You are unable to do at least one; or
- You are unable to perform the regular duties of your occupation at least half the time required.
Benefit payments for partial disability are 50% of those for a total disability.
How much does business overhead expense insurance cost?
The cost of a business overhead expense policy depends on many factors, including:
Your occupation: Jobs that require more manual work and physical exertion will have a higher cost.
Your age: Older people pay more for coverage than younger people.
Your gender: Disability insurance costs more for women than men.
Your smoking status: Disability insurance costs more for smokers than non-smokers.
The benefit amount: The higher the monthly benefit, the more the premiums.
The elimination period: The shorter the elimination period, the higher the cost.
The benefit period: The cost of the 24-month benefit period is higher than the shorter benefit periods.
Because of all of these factors, it isn’t easy to pinpoint the cost of a business overhead expense policy. Feel free to use the tool at the bottom of this page to request a quote.
What other features are there?
The following features enhance your business overhead expense policy:
Extension of benefits: The insurance company will pay you beyond the benefit period if you’re still disabled until you receive the maximum amount.
Guaranteed premium: Premiums are locked in until age 65, which gives your budget stability. After age 65, your premiums can increase.
Exchange: If you’re no longer self-employed, you can exchange the business overhead expense insurance for a regular disability insurance policy.
Recurrent disability: Disabilities separated by six months or less are treated as a single disability, so you don’t need to satisfy the elimination period again.
Accumulation of days: You can accumulate the elimination period from separate disabilities if they have the same or related cause and are separated by 12 months or less.
Waiver of premium: The insurance company waives your monthly premium while disabled. Any premium paid during the first 90 days of a disability is refunded.
Future expense coverage: This optional rider lets you buy more coverage later without providing evidence of insurability. You only have to show that you have the additional business expense to justify the increased coverage. The premium for your new coverage will be based on your age when you exercise the increase.
What are the exclusions?
The exclusions for business overhead expense insurance are similar to a long-term disability insurance policy. It will not pay benefits for disabilities caused by:
- An accident or act of war, whether declared or undeclared; or
- Normal pregnancy or childbirth, but it will cover disabilities caused by their complications.
Which Expenses Does A Business Overhead Expense Policy Cover?
Business overhead expense insurance covers a wide range of fixed business expenses. Here is a table showing which ones are covered and which are not.
Type of business expense | Covered? | Notes |
|---|---|---|
Accounting service | Yes | Only if it is a recurring expense. |
Bad debts | No | |
Bank service charge | Yes | This includes the monthly banking fees for your business account. |
Bonuses to employees | No | The business overhead expense policy only covers their normal wages.
|
Business overhead expense insurance premium | No | The monthly premium will be waived, so this is not an ongoing business expense.
|
Capital cost allowance | Yes | Only for medical/dental equipment, office furniture and equipment, and the building your business owns and operates out of.
|
Car insurance, loan, and lease | Yes | Only for the portion used for business purposes is covered.
|
Donations and charitable contributions | No | |
Educational costs | No | The policy doesn’t cover costs related to retraining for a different occupation.
|
Employee salaries | Yes | Only for administrative and support staff. It does not cover the wages of anybody sharing your overhead expenses or any new staff hired after the onset of a disability.
|
Employee benefits | Yes | The policy covers group insurance for employees, including group life, disability, extended health and dental benefits.
|
Property and general liability insurance | Yes | |
Professional liability and malpractice insurance | Yes | |
Interest and principal on equipment loans | Yes | Only for equipment that is necessary for the operation of the business.
|
Leased and rental equipment | Yes | |
Legal fees | No | |
Office supplies | Yes | Only for general office supplies.
|
Parking fees | No | |
Payroll taxes | Yes | This includes the employer’s portion of EI and CPP premiums. |
Postage | Yes | |
Professional dues and membership | Yes | |
Property tax | Yes | Only if the business owns the building and operates out of it.
|
Rent/mortgage | Yes | If the business owns the building, the policy covers the mortgage. If you lease your business premises, the policy covers the rent instead.
|
Service/maintenance contracts | Yes | These are ongoing expenses that your business still has to pay while you’re disabled.
|
Travel and entertainment costs | No | |
Utilities | Yes | For example, electricity, heat, water.
|
Workers’ Compensation premium | Yes | Only for employees’ coverage. |
Your salary | No | You need to purchase a personal disability insurance policy to replace your income.
|
Is Business Overhead Insurance Tax-Deductible?
Unlike other types of disability insurance, business overhead expense insurance is tax-deductible from your income. Whether you’re a sole proprietor or an incorporated business owner, you can benefit from a reduced tax cost when you buy a business overhead expense policy.
However, you do have to declare any benefit payments as taxable income. The overhead expenses offset this completely, so you effectively end up with tax-free benefits.
Looking To Protect Your Business?
Do you already have a personal disability insurance policy to protect your income and are looking for something to protect your business? Maybe you need both?
Contact us today and get the advice to find you the right business overhead expense insurance policy. We’ll get you the coverage you need to keep your business running if you become disabled due to an injury or illness.
For a free, no-obligation quote in Canada, contact us at 604-928-1628 or info@briansoinsurance.com or use the tool below.
Get Your Business Overhead Expense Insurance Quote Now
While we make every effort to keep our site updated, please be aware that timely information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Brian So Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser. This post is a brief summary for indicative purposes only. It does not include all terms, conditions, limitations, exclusions, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details which can be provided upon request. In case of any discrepancy, the language in the actual policy documents will prevail. A.M. Best financial strength ratings displayed are not a warranty of a company’s financial strength and ability to meet its obligations to policyholders.
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