10.3 Business Disability (Key Person, Buy-Sell, BOE)

Disability income concepts extend to businesses, which face financial loss when an owner or key employee cannot work. The national exam tests three business DI products and the distinct purpose, premium deductibility, and benefit taxation of each.

Key Person (Key Employee) Disability

Key person disability insurance protects the business against lost revenue or replacement costs when a vital employee — a top salesperson, lead engineer, or founder — becomes disabled.

• Applicant/owner/premium payer/beneficiary: the business.
• Insured: the key employee.
• Premiums: NOT tax-deductible to the business.
• Benefits: received income-tax-free by the business.
• Use of benefits: cover lost profits, recruit and train a replacement, reassure creditors.

Disability Buy-Sell

A disability buy-sell policy funds a buy-sell agreement so that, if a co-owner becomes totally disabled, the remaining owners (or the business) have cash to buy out the disabled owner's share at a predetermined price.

Exam trap: Disability buy-sell uses a long elimination period because a company will not buy out an owner who may soon return. Personal DI uses short ones. Watch for the swapped distractor.

Business Overhead Expense (BOE)

Business Overhead Expense (BOE) insurance reimburses a disabled business owner for the fixed operating expenses of keeping the business open while they recover — it does NOT replace the owner's personal salary.

Covered overhead typically includes:

• Rent or mortgage interest on business premises
• Employee salaries (non-owner staff) and payroll taxes
• Utilities, telephone, internet
• Equipment leases and maintenance
• Property taxes, business insurance premiums, accounting/legal fees

Not covered: the owner's own salary or draw, the cost of inventory/goods, or new capital purchases.

Key BOE features:

Exam trap: BOE is the one business DI product whose premiums are deductible and whose benefits are taxable — the reverse of key person and buy-sell. Because benefits reimburse already-deductible overhead, the net tax effect is roughly neutral.

Disability Buy-Sell and Business Overhead Expense

The section's two remaining business products complete the trio:

Disability Buy-Sell funds the purchase of a disabled owner's business interest by the co-owners or the entity. Key facts:

• Premiums are NOT tax-deductible; benefits are received income-tax-free.
• A long elimination period (often 12-24 months) is used because partners want certainty the disability is permanent before triggering a buyout.
• Benefits may be paid as a lump sum or installments to fund the purchase price set in the buy-sell agreement.

Business Overhead Expense (BOE) reimburses a small-business owner for fixed operating costs — rent, utilities, employee salaries, leased equipment — while the owner is disabled, so the business can stay open.

• Premiums ARE tax-deductible as a business expense; benefits are taxable (but offset by the deductible expenses they reimburse).
• BOE pays actual covered expenses up to a monthly cap, not the owner's salary, and uses a short elimination period with a limited benefit period (1-2 years).

Taxation Summary for Business DI

The tax treatment of each business product is a favorite exam grid — memorize the pairing of premium deductibility and benefit taxability:

The logic the exam rewards: when premiums are paid with after-tax dollars (key person, buy-sell), the benefits are tax-free; when premiums are deducted (BOE), the benefits are taxable. BOE is the lone deductible-premium product because it reimburses ordinary, deductible business expenses rather than replacing the owner's personal income. Apply this same after-tax-in/tax-free-out logic across all of disability and life taxation.

Matching the Product to the Business Need

Scenario questions reward matching the correct business DI product to the stated problem:

• "Cover lost revenue and the cost to replace a star employee" -> key person DI (business owns/pays, benefits tax-free).
• "Fund the purchase of a disabled partner's ownership share" -> disability buy-sell (long elimination period, benefits tax-free).
• "Keep paying rent, utilities, and staff salaries so the practice stays open" -> business overhead expense (premiums deductible, benefits taxable, short benefit period).

Trap: BOE reimburses actual fixed expenses up to a monthly cap, not the owner's salary; the owner's personal income is protected by individual DI instead. Buy-sell uses a long elimination period because partners want proof the disability is lasting before triggering a buyout, while BOE uses a short one because overhead bills come due immediately.