Why Solo Practitioners Should Not Forget About Business Overhead Expense InsuranceSubmitted by Durbin Bennett Tax Advisors on January 2nd, 2018
At 36 years old, Jennifer had it all – a growing practice, 3 excellent employees and a beautiful suite in a new medical complex. Having spent considerable time planning her future, she also had everything in place to save and manage her money tax efficiently, and she still owned the individual disability policy she has had since residency. Yes, she had it all – except one thing: She didn’t have any business overhead expense insurance (BOE). Unfortunately, it wasn’t until she needed it that she realized how important it was to securing her future.
One year into her solo practice, Jennifer suffered a severe spinal injury when a drunk driver slammed into the passenger side of her car. Following emergency surgery she was hospitalized for two weeks, and then required several weeks of traction before she could begin rehabilitation therapy. With her being the only source of revenue for the practice, she was forced to pay the expenses out of her own pocket until it began to drain her bank account. The day she let her employees go was the second worst day of her life.
The good news is that Jennifer did have individual disability income insurance which, after 90 days of disability, began to pay a benefit worth 70% of her income until age 65. Her prognosis is good for returning to work at some point, but it could be six months or more before she can gradually take on patients and she may not be able to perform at the same level.
In setting up her practice, Jennifer had made nearly all the right moves. In fact, obtaining business overhead expense insurance was on her to-do list. She would get around to it when her 60+ hour work week allowed. A business overhead expense disability policy would have covered her rent, employee salaries and benefits, utilities, professional fees, interest expenses, insurance and any other ordinary and necessary fixed expenses.
BOE insurance is similar to individual disability insurance in that the benefits are triggered by a disability that meets the definition of the policy. However, there are a few ways it differs.
Shorter Benefit Period: Most BOE policies will pay benefits for one to two years.
Maximum Monthly Benefit: BOE insurance benefits cover the eligible overhead expenses of a practice. If the benefit amount in the policy is $3,000 and the overhead expenses amount to $2,000, the difference remains with the policy and can be available to extend the benefits beyond the benefit period.
Taxable Benefits: The benefits from an individual disability policy are generally received tax-free; however the benefits payable from a BOE policy are taxed as income to the business. Unlike disability income policies, however, the premiums for BOE policies are tax deductible to the business.
In the event of disability, BOE insurance is the most efficient, and for many practitioners, the only way to ensure the continuation of their practice.
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