Business Overhead Expense Insurance – Do I need it?

Personal disability insurance protects a physician’s ability to earn income, but what protects his or her medical practice? Business overhead expenses are just as relentless for those who suffer a disability. A practice that relies on a small number of people (or one person) to produce revenue is economically vulnerable if one of those individuals becomes disabled. A business overhead expense ("BOE") disability policy will cover the ongoing operating expenses of your practice. It ensures that you do not have to use personal assets to pay for business expenses if you become disabled.

If the insured does become disabled, a BOE policy pays a monthly benefit based on business expenses, not anticipated profits. The following are some business overhead expenses that are covered by BOE insurance:

- Rent or Mortgage Payments
- Employee Salaries and Benefits
- Utility Bills
- Property Taxes
- Accounting Fees, Legal Fees, and Professional Dues
- Malpractice and Other Business Insurance Premiums
- Maintenance and Janitorial Services
- Depreciation
- Interest on Business Debts
- Office Supplies
- Other Fixed Expenses that are Ordinary, Necessary, and Tax Deductible

Some policies even cover the salary of a temporary employee hired to do the duties of the disabled. Income taxes, the cost of inventory, and the cost of furniture are a few expenses that are not covered.

There are several key areas in which BOE insurance differs from personal disability insurance.

Benefit Periods – Usually, BOE insurance policies have short benefit periods that do not exceed two years. Remember that BOE insurance is not protecting your ability to generate income—that is what a personal disability policy does. Instead, BOE insurance allows you to keep your practice open, or at least pay for its expenses until you recover. In the case of a long-term disability, it offers you up to two years to make a business decision, such as whether to shut down or liquidate your practice, without worrying about accruing debt from business expenses.

Maximum Benefits – Personal disability insurance pays a monthly benefit as defined in the policy. BOE insurance policies offer a maximum monthly benefit, but only pay the actual overhead expenses if they are less than the maximum benefit. For example, if the maximum monthly benefit is $1,000 but actual business overhead expenses are only $600, the benefit paid is $600. With some insurers, that unused $400 benefit can be applied to increase future monthly maximums or to extend the benefit period.

Taxation – As long as premiums for personal disability insurance are paid with after-tax dollars, the benefits are tax free. DOE insurance benefits are subject to income tax, but the premiums are tax deductible as a business expense.

One similarity that BOE insurance and personal disability insurance policies share is that the sooner you purchase a policy, the better. Not only will you get lower rates when you are younger and generally in better health, but additional coverage can be purchased later without providing further evidence of medical insurability.

BOE insurance is a great idea for small practices with several physicians. If one physician is disabled, their portion of business overhead expenses will be covered by the policy so the other physicians are still able to practice without an extra financial burden.

By andy puls
Published: 1/26/2007