Overhead Expense Insurance – Income Replacement Part 5

Jul 8, 2024 | AEB Insights, Employee Benefits

Overhead Expense Insurance

Help businesses keep their door open during a disability.” [1]

Source: Principal 

Overhead Expenses (OE) insurance is a type of disability insurance policy written for a business owner to reimburse the business for covered expenses if the business owner becomes disabled—too sick or injured to work (even remotely).  When Key Person Insurance is not an ideal match for business needs (see Part 4 of this series), considering this overhead expense coverage may keep the business doors open should its owner be temporarily disabled.

The State of Ohio allows Overhead Expense Insurance, and this is important as not all states do. Such policies, when premiums are paid, are not cancelable, and renewal is guaranteed up to the business owner’s age 65 policy anniversary or for five years from the policy date, whichever comes later. Again, this could potentially vary by carrier and policy.

There is also a caveat on the eligible occupation classes 3A and above.  See Table 1 below.

As a business strategy, this coverage can keep the doors open and ensure that the business remains financially sound should it be necessary to sell.

Expenses covered are normally those that are deductible for federal income-tax purposes and may include but are not limited to the following —all subject to the individual policy and carrier.  Typically, mortgage or rent, salaries, wages, benefit payments, employment taxes for employees, rent and lease payments for furniture, equipment, and premises. Utility costs include phone, internet, electricity, heat, and water, as well as janitorial and maintenance service costs.  Other types of insurances such as malpractice might also be covered.

Some overhead coverages offer a “Salary Replacement Rider”  that reimburses the business for costs associated with hiring [1] or even training a capable replacement to keep the business operational. This is not the same as key person disability insurance, which could potentially cover the salary of the disabled business owner. An important distinction is that overhead expense coverage with a “Salary Replacement Rider” could provide funds to pay the salary of a replacement for the disabled owner rather than the salary of the disabled business owner.

About This Income Replacement Insights Series:

This is the fifth and last in a 5-part series of Insight articles that examines a specialized type of disability insurance covering Overhead Expenses with specialized insurance. These are the series topics:

  • Disability Insurance Overview – Income Replacement Part 1
  • STD (Short-Term Disability) Insurance – Income Replacement Part 2
  • LTD (Long-Term Disability) Insurance – Income Replacement Part 3
  • Key Person Disability Insurance – Income Replacement Part 4
  • Overhead Expense Disability Insurance – Income Replacement Part 5 – you are here

Overhead Expense Insurance - AEB Insights Income Replacement Part 5 - this business is permanently closed

Table 1 – Eligible Occupation Classes

Occupation ClassDescription
3AMost professionals and managers — office duties only; with travel
4AMost professionals and managers — office duties only; no extensive traveling
5ASelect professionals and managers with most favorable underwriting and claims experience

Table 2 – Ineligible Occupation Classes

Occupation ClassDescription
ACertain skilled trades & supervision (foreman) and some medical support personnel.  Work is often performed in a shop, medical facility, retail establishment or outdoors using light machinery; direct supervision of personnel performing manual duties; chiropractors
BPersonnel engaged in heavy manual duties; skilled and unskilled occupations (laborer)
2APersons engaged in social service, medical support, clerical, selected commission sales or office or retail setting; light manual duties

How Much Coverage is Provided?

Specifications will vary from carrier to carrier.  Benefits can range from 12 to 30+ times covered expenses up to a maximum of $50,000 per month (for most policies). Further, elimination (waiting) periods can range from 30 to 90 days.

Options described below are not necessarily available with all carriers and policies. Still, they are outlined in the table below to inform about possibilities and topics for discussion with AEB during the Strategic Plan Design phase of a Benefits design process.

Overhead Expense Policy Options to Explore

OE Options to ExploreDescription
Renewable after age 65A Renewal Option may continue the policy beyond the termination date if the owner works at least 30 hours per week and is not disabled at the time of the request. Certain limitations apply.
Total Disability BenefitIf enabled, the policy would pay benefits if the insured cannot work in his or her regular occupation because of a total disability, as defined by the policy.
Partial Disability BenefitIf enabled and the owner is partially disabled, the policy could reimburse  50 percent of the covered business expenses (up to the policy maximum) for up to six months.
Benefit and Expense Carry-forward FeatureThis option provides that while the insured remains continuously disabled, unused benefits and unreimbursed expenses may carry forward to future months of continuous disability (subject to policy limits).
Conversion OptionThis option may be available for those business owners whose needs change after two years from the effective date AND before turning 60.  The owner may request conversion of this policy to an individual disability income policy. Certain limitations may apply.
Waiver of Premium BenefitWhile the business owner is disabled, the carrier waives future premiums due and will refund any premiums already paid since the disability began.
Presumptive Total Disability BenefitWith this enabled, the carrier presumes that the business owner is eligible for the total disability benefit if an injury or illness results in loss of speech, hearing in both ears, sight in both eyes or use of two limbs, as defined by the policy. [2]
Survivor BenefitIf the business owner dies while receiving total disability benefits, the carrier will pay the owner or the owner's estate up to three times the base amount but not more than any remaining maximum benefit. This benefit is not available in some states.
Salary ReplacementThis rider may be available to occupation classes 3A, 4A, and 5A and potentially at no additional cost. It allows the business to hire someone (other than a family member) to perform its duties and to have that person's salary included as a covered expense.
Residual Disability RiderThis rider adds residual disability and recovery benefits to the business owner's coverage. When enabled, the carrier could pay a residual disability benefit if the business loses at least 20 percent of its income while the owner attempts a return to work. Policies may also pay a limited recovery benefit for up to 12 months if, immediately after a disability for which the owner received benefits, said owner returns to work for at least 30 hours per week in his or her regular occupation.
Future Purchase Option RiderAs the business grows and its expenses increase, this rider allows it to purchase increased benefits at two-year intervals, regardless of health (subject to financial underwriting requirements).
Disability Buy-Out PlanWhen a disability prevents one business owner from fulfilling obligations to the other business owners, a disability buy-out plan can help mitigate this risk.  These policies are structured to fund business partners to purchase an owner’s interest in the business if he or she becomes totally disabled. This coverage maximizes the financial return when a company is transferred while minimizing tax liability.
Options described below are not necessarily available with all carriers and policies.

What if the maximum amount of coverage is not enough?

Realizing that some businesses have very large amounts of overhead, the maximum benefit of $50,000 per month coverage may not be sufficient. While unusual for a small to midsize business, a Supplemental business overhead insurance disability plan may be explored. This type of supplement is for excess to an existing coverage and would increase the total benefit with higher limits.

Key benefits of an OE Supplemental Plan:

  • High limits, up to $100,000 per month in benefits
  • Difficult or unusual occupations can be covered
  • Impaired Risks – Unlike traditional carriers, these can handle many health impairment situations
  • Not limited by groups of the same occupation – Most carriers will not consider a group of business owners who are all in the same occupation

Benefits:

  • Elimination periods of 30,60,90 or 180 days
  • Benefit periods of 6,12,18 or 24 months
  • Benefit amounts of $1,000 – $100,000

Optional riders:

  • Residual benefits rider
  • Salary replacement rider

Source:  High Income Protection [3]

Conclusion

Business overhead expense insurance should be considered necessary for small to midsize businesses.  An Overhead Expense Insurance policy can help the company when an owner or critical employee cannot work due to sickness or injury. Benefits will vary among primary carriers in the industry. Still, with each, the core coverage is most important to secure with a goal to protect the business and keep the doors open during an otherwise volatile period.  Talk to AEB about adding this coverage and discussing recommended options to fit the company during the Strategic Plan Design.


Reference Sources¹

Cited references with some as direct quotes.

  1. Principal 
  2. Platinum Advantage GSI | The Standard. 
  3. High-Income Protection

Another interesting resource:


Review the following relevant AEB content:

Other Posts in this series as they are published:

  • Disability Insurance Overview – Income Replacement Part 1
  • STD (Short-Term Disability) Insurance – Income Replacement Part 2
  • LTD (Long-Term Disability) Insurance – Income Replacement Part 3
  • Key Person Disability Insurance – Income Replacement Part 4

¹Outbound links all open in a new browser window or tab,

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