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Disability / Salary Insurance - Overhead Expense Policy

Over head Expense Polciy -  Disability Salary InsuranceTo small business owners, the implications of a disability go beyond their personal finances. A disability will also adversely affect their business finances. In some cases, disability may even force them out of business. Not only could a disability devalue an asset that someone worked years to create, but if the business doesn’t survive the owner’s disability, the owner will have no job to return to upon recovery, aside from the financial consequences, just think of the psychological consequences.

The disability insurance industry has created three business products, designed to protect three distinctly different business problems that a disability could create. They are: overhead expense disability insurance, key person disability insurance and disability buy/sell insurance.

An overhead expense policy reimburses covered fixed business expenses during the disability of an insured owner.

Reimbursement Benefit
Overhead expense insurance pays a reimbursement-type benefit. This means that the monthly overhead expense benefit payable is contingent on the covered expenses incurred by the business during each month of disability. The client purchases a monthly benefit maximum, but the benefit could be less than the maximum if expenses are less than the maximum in any given month.

Covered Overhead Expenses
Not all business expenses are eligible for reimbursement. Expenses must be normal and customary (i.e. with a demonstrated history). This prevents the insured from using the overhead expense benefit to fund new expenses or adding to existing expenses during a disability. As a general rule, overhead expenses that are fixed rather than variable are more likely to be covered. Lease of premises is an example of a covered fixed expense. Newspaper advertising is an example of a variable expense that would likely not be covered.

The following is a list of business expenses covered by most overhead expense policies:

  1. Rent / lease of premises;
  2. Utilities;
  3. Telephone and telephone answering service;
  4. Association dues;
  5. Property taxes;
  6. Accounting services and collection fees;
  7. Business insurance premiums;
  8. Postage and stationery;
  9. Laundry, maintenance, and janitorial service;
  10. Depreciation on business assets;
  11. Interest on mortgage or business loans
  12. Scheduled business loan payments (alternative to 10 and 11 above);
  13. Lease of business equipment; and
  14. Employee salaries (not performing the owner’s occupation and not related to the owner).

If the business owner has business partners who share expenses, then the policy would reimburse only the disabled person’s share of the above covered expenses.

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