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Just as an individual purchases disability income insurance to protect their ability to earn a living, a business purchases business disability insurance on a key employee to protect the business itself from financial loss if that employee becomes disabled.
Key person disability insurance is purchased by the employer on the life of a key employee. The key person's economic value to the business is measured in terms of the potential loss of business income that would result, along with the cost of hiring and training a replacement. The contract is owned by the business, the premium is paid by the business, and the business is the beneficiary. The key employee is the insured, and the business must obtain the key person's written consent to be insured.
In key person disability insurance, the business is the contract owner, the premium payor, and the beneficiary.
Business overhead expense (BOE) insurance is a specialized policy sold to small business owners who must continue covering overhead costs — such as rent, utilities, salaries, installment purchases, or leased equipment — even after becoming disabled. A BOE policy reimburses the business owner for the actual overhead expenses incurred while the owner is totally disabled; it does not reimburse the owner's own lost salary, compensation, or other personal income. BOE policies typically carry an elimination period of 15 to 30 days, with benefits usually limited to one or two years. Benefits are capped at either the covered expenses actually incurred or the maximum monthly benefit stated in the policy. Premiums paid for BOE coverage are tax deductible to the business as a business expense; however, benefits received are taxable to the business as they are received.
A buy-sell agreement is a legal agreement, typically drafted by an attorney, that specifies how ownership of a business will transfer between owners when one owner dies or becomes disabled. It is common for the business to purchase insurance to provide the cash needed to fund the buyout when an owner dies or becomes disabled. Policies that fund buy-sell agreements generally carry an unusually long elimination period — possibly one or two years — and generally pay a large lump-sum benefit to fund the buyout rather than paying monthly income benefits.