The “Aha!” moment. If you are like us, we’re sure you love the feeling you get when you find a solution to a problem or understand a certain product. The light bulb goes on, the excitement builds-it’s that feeling that “this makes a lot of sense.” That’s the feeling we are told advisors get when they understand the tremendous need for BOE insurance.
BOE
Yes, another insurance acronym, which stands for Business Overhead Expense disability insurance. There may be some variations of name with different companies, but most call it BOE.
The Basic Idea
A business owner client has a prolonged sickness or injury that causes a disability and loss of work. Being the business owner, your client is still fully or partially responsible for the monthly bills and expenses of the business. A BOE disability policy is intended to create a reimbursement for those qualifying expenses.
The Market
A small business owner or professional (physician, dentist, attorney, accountant, etc.) that is ultimately responsible for paying the expenses and the employee payroll of the firm. Typically, the firms that are most susceptible to the perils of a disability would be the smaller firms in which the revenue created is dependent on the owner’s ability to work. One of the key underwriting criteria will be the need for the coverage. Will the firm lose significant revenue if the owner becomes disabled? In many cases it’s very obvious. For example, if a lawyer, physician, accountant or dentist has six employees and can’t practice due to an injury or sickness, then the primary revenue creator is no longer creating the required revenue. If a business has a large amount of employees, say a restaurant owner of an upscale restaurant, it may be more difficult to prove a revenue loss if the owner becomes disabled. If a firm has multiple owners, then the underwriter may ask to see the operating agreement to see if there is an allocation of expenses clause or something that would indicate each owner is independently responsible for the expenses of the firm.
The Need
The owner of a business will either personally or corporately obligate themselves to pay the overhead expenses of a business. This is part of the risk and reward trade off of being a business owner as opposed to an employee. The business owner assumes more risk but can reap more rewards in return. Most business owners do not take into account the risk of becoming disabled and how that would affect their business, personal income and net worth.
Disabilities come in different shapes and sizes, but there will be a time in which the business owner will need to make a decision to continue, sell, or close down the firm. Each scenario can be different, but you can only imagine the mental anguish of trying to recover from an injury or sickness and also making life changing decisions for not only the business, but also all the dedicated employees of that business.
Take a successful attorney, physician or dentist that has five employees: Two medical or legal assistants and three office personal (front desk, secretarial /insurance filing/bookkeeping, and other clerical duties). If the revenue creator becomes disabled, which employees are kept on and which are let go? Now add some more elements, such as highly trained employees that have developed intimate knowledge of the business. It can take years to train employees on various aspects of a business-working with insurance companies, vendors, preparing the books, maintaining a database, website, and so much more. Most owners would not want to close down the practice and layoff highly valued employees if the owner feels or is told that they should be able to get back to work in the “near” future, say a year or two.
In addition, the business owner has obligated themselves for being responsible for other business expenses. It’s not uncommon to have a long lease, leases that last five years or longer. In addition, some office space leases require a share of the property taxes and common expenses be paid as well. The business owner also has to maintain other common business insurance, such as: Liability insurance, workers’ compensation insurance, malpractice insurance, property insurance, and health and other employee benefit types of insurance. It is important for the business owner to ensure they have the proper coverage, ideally opting to research options like https://www.leveragerx.com/malpractice-insurance/ before making any direct moves. The investment at an early stage can pay off greatly later down the line if something were to happen. Without this coverage, the business as a whole could ve very vulnerable, but with it stability can continue despite a worst-case scenario rearing its head. Business owners looking to protect themselves should check here for more detail on business insurance solutions. There are other common expenses as well, such as utilities, office equipment leases for copy machines and other office equipment, computers, business software (click here to see how you can develop your own!), professional dues, and postage among the many type of monthly obligations, many of these monthly costs can be decreased by looking for the same product for a cheaper price, such as comparing utility providers somewhere like Utility Bidder, for cheaper monthly utility bills, for example. In addition, most business owners still need other professional services that need to continue such as accounting, computer/network maintenance, and legal services to name just a few. Just reading about all these expenses can be overwhelming. Now imagine a successful client that survives a bad car accident and requires corrective surgeries and/or months, if not years, of rehabilitation. What about the client that is diagnosed with a potentially fatal form of cancer but needs to go through years of treatment before the final outcome is really known?
The Loss to the Business Owner
Eventually there will be a crossover point in the business in which the loss of revenue caused by the disabled owner will create a perilous situation for the business. For a business to create income, the revenue must exceed the expenses. If the primary revenue creator and business owner is disabled, there will be a loss of revenue. At a certain point the business owner will be forced to pay the expenses of the business out of personal savings, start to trim the expenses of the business or, even worse, shut down the business. While some may say the business can be sold, the value of a service business typically will diminish very quickly without the primary revenue creator involved. The longer the disability, the more patients and clients need to seek services elsewhere resulting in even a greater loss of value. What about hiring a person to fill in for the disabled owner? While that may be possible, it’s unlikely for several reasons. The success of the firm is usually based on that revenue creator but, even so, the firm would need the “right” person. Who is going to do the professional search and conduct the interviews? It can take years to find the right person or associate. In addition, even if the right person is found, adding a new professional increases the firm’s expenses tremendously. In addition, restarting a flow of revenue will have a natural delay and may be less then previous receipts. Also, the cost of a professional with the same duties as the policyowner may be an excluded expense in the BOE policy.
The Policy
Most BOE policies will usually have similar features: A waiting/elimination period, usually 30,60, or 90 days, and a benefit period, usually 12, 18 , or 24 months. A BOE policy will vary from an individual disability policy in that the monthly benefit is paid as a reimbursement of qualified expenses. In addition, there is usually a provision indicating that any monthly benefit that is not claimed in the request for reimbursement may be used later so it is not lost. For example, a client has a $10,000 per month BOE policy and a 12 month benefit. If the client has a qualifying disability and has $5,000 of reimbursable expenses, then the policy benefits may last for 24 months instead of just the 12 months. Please review the definitions and insuring agreement of any BOE policy you may propose, as policies can vary.
The Taxes
We don’t provide tax advice and your client should seek individual counsel for their particular situation. In general though, it’s typically accepted that the premium for a BOE policy is usually treated as a business expense. In addition, the reimbursable nature of the policy usually creates an offset of income and expenses which would normally result in a non-taxable event.
Most likely you have clients in your advisory practice that need this type of policy. Now it’s up to you to educate them as well.
Exploring Association Group Disability Insurance Coverage.
We’ve recently been asked about association group coverage and wanted to touch base on some features to make note.
Why is it that some association group disability plans can be priced less than individual disability plans? Sometimes the price difference can be significant, so how can this occur? In fact, some association group plans insure the same highly sought-after occupational classes that individual disability insurance companies seek out. We are not talking about association discounts on individual plans, we are referring to plans that are developed for an association that use a group chassis.
If the occupations are similar or the same, then the morbidity rate would be similar as well. So, if the morbidity rates are similar, how can the group association plan charge substantially less premium? Typically, the contract would need to have provisions that may have an impact on policy pricing. Along with this, one of the questions people forever ask, is just how much should disability insurance cost? So, let’s look at some of those provisions that may influence product pricing. (Note-the association group marketplace is dynamic, and policies will vary from company to company, so please ask your client to obtain a specimen contract to be reviewed.)
Termination
Individual: Most individual plans are guaranteed renewable to a certain age, usually age 65. The company that underwrites the individual plan can’t cancel the policy and may even have provisions so the client can keep the policy past age 65.
Group: Most group plans have provisions that allow the insurance company to cancel the plan. Why is this important? If a client’s association group DI coverage were cancelled, they would need to obtain a new policy. There are medical conditions that may still allow a professional to work but may make them uninsurable for an individual plan’s underwriting. For example, an individual with treated cancer or heart disease may still be able to work but may be uninsurable or postponed. In addition, as one gets older, the premiums for individual coverage tend to be more expensive. The pricing of today’s individual DI product would most likely be significantly less expensive than a similar product ten years from now.
Rate Guarantees
Individual: Many individual plans are purchased with a provision called noncancelable, guaranteed renewable. The expansion of the guaranteed renewable clause can cause some confusion from a policy that is just “guaranteed renewable.” Essentially the “noncancelable” prevents the company from changing policy provisions, including the premiums, without the policyholder’s permission. Typically this provision will expire at a certain age, usually age 65.
Group: Many group coverage certificates will have variable rates that can change based on age, so as a client gets older their rate will increase assuming the plan has not been cancelled. In addition, many group contracts are built with provisions that allow the company to change the pricing of the actual product. Having certainty of pricing is of great value, especially over a 10 year, 20 year, or even a longer time period.
Association membership requirements
Most association group plans require that the certificate holder maintains their membership in the association. It’s important that the cost of the association and future increases in association dues be considered when a cost comparison is made between plans. Some associations have additional membership requirements that may need to be maintained in order to renew membership. In addition, some members may not always be socially, politically, or culturally aligned with their association, but dropping their membership would nullify their disability coverage. The association member must be aware of the various factors involved when their disability insurance is entangled with a membership requirement. Disability insurance can be someone’s most important insurance protection. To have that protection wrapped up and dependent on association membership can possibly become detrimental in the future. While premiums allow someone to pay for an individual disability policy, someone’s health and financials allow them to pass underwriting and to obtain an individually underwritten policy. If a client decides in the future that association coverage wasn’t a good match for them, it’s possible that their medical or financial underwriting may prevent them from obtaining an individual policy issued today. In addition, we never know what products may be available in the future, but we do know what is available today.
Policy provisions
We’ll touch on a few of the basic points that are important for someone who is considering buying an association group disability plan.
Total disability requirements during the elimination period: We tend to find this provision in some association group plans. It’s rare to find this in an individual plan, but we’ve seen it a few times here and there. This provision requires that, during the elimination period, the individual must be totally disabled. To become eligible for monthly benefits they can’t be working at all for the full 90 days or 180 days of the elimination period. Remember, if someone were going to the office a couple of days a week, they usually would not be considered totally disabled but rather partially or residually disabled. Most of the comprehensive individual disability plans will allow the elimination period to be satisfied with either a total or partial/residual disability claim. This provision raises the bar on who can or can’t qualify for a disability claim. Disabilities come in all shapes, sizes, durations, severities, and affect people differently. This one provision in an association group plan can restrict many individuals from qualifying for a disability claim that otherwise may have been covered under an individual policy. We can’t stress enough how limiting this provision can be for those who are unaware of its ability to be a barrier to a seemingly obvious claim.
Reduction of benefit based on current income: Again, we tend to find this provision in some association group plans. It’s rare to find this in an individual plan, but we’ve seen it a few times. The provision, usually called a Relation of Earnings clause, indicates that, at the time of claim, the policy will not pay more than what an individual earned the last year or two years depending on the contract. This means that the group member may be paying an annual premium that allows them to obtain a benefit only up to a certain amount of coverage. In fact, they may have qualified for that full amount based on their earnings at the time the application was submitted and the certificate issued. Fast forward years later and now the individual may be earning a lot less than they did when the certificate was purchased. At claim time, that individual may not be paid the full benefit if the benefit were to exceed their more recent income.
There are other provisions that may or may not be applicable that should be reviewed as well, such as: Changes in the definition of disability as the claim proceeds; mandatory rehabilitation provisions; integration of other income such as social security, workers compensation from somewhere like Scotti Insurance, retirement benefits, and pass-through income received as a result of being a partial or full business owner; soft tissue and self-reported ailment exclusions or benefit period restrictions; and mental nervous benefit limitations.
The value received is the value perceived. Skilled professionals are sought out due to their knowledge of certain professions. For the most part, analysis of a group association disability policy and the analysis of important provisions is not part of the training, education, and background of most skilled professionals. If someone knew they were going to be in a car crash, how many airbags would they want installed in their car? Would someone buy a car with no seat belts in order to save money? How large of a safety net would one want if they were an acrobat, how narrow or wide? When purchasing a product that may be someone’s financial lifeline, seek out the most comprehensive disability policy possible! The wider the net, the more comprehensive the policy, the more it can have the ability to catch the wide variety of disabilities that can occur.