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

Disability does not only threaten an individual paycheck; it threatens businesses that depend on key people and owners. The exam tests three distinct business DI products. The trap is matching each product to who it protects and what it pays for, because their owners, premiums, and tax treatment differ.

Key Person (Key Employee) Disability

A business buys this on the life/health of an essential employee whose disability would hurt revenue. The business is the owner, premium payer, and beneficiary; the key employee is the insured.

Exam logic: when premiums are NOT deductible, the corresponding benefits are tax-free. This pairing repeats across business DI and is a frequent exam pattern.

Disability Buy-Sell

Funds a buy-sell agreement so that when an owner becomes totally disabled, the remaining owners (or the business) can purchase the disabled owner's share at a predetermined price. This keeps ownership among the active partners and gives the disabled owner liquidity.

The long elimination period is intentional: a buyout is irreversible, so the policy waits to confirm the disability is permanent before funding it.

Business Overhead Expense (BOE)

BOE reimburses the ongoing fixed business expenses of a disabled owner (typically a small professional practice) so the doors stay open until the owner recovers or the business is sold. It does not replace the owner's salary; that is what personal DI does.

The tax pattern flips for BOE: because premiums are deductible, the benefits are taxable. However, the benefits are used to pay deductible business expenses, so the net tax effect typically washes out.

Quick Comparison of the Three Products

Notice the BOE row is the odd one out on taxation, and it reimburses actual expenses rather than paying a flat benefit. Those two facts are the most commonly tested distinctions.

How a Producer Layers Business Coverage

A closely held practice rarely needs only one product. A common, exam-realistic layering: the disabled owner draws on personal DI for salary replacement, BOE keeps the lights on for the first year or two, and a disability buy-sell (with its long elimination period) stands ready to fund a buyout only if the disability proves permanent. Key person DI sits on top when a non-owner employee is genuinely irreplaceable.

Matching the need to the product is the skill the exam rewards. If the scenario stresses ongoing rent and payroll, choose BOE; if it stresses a buyout price among partners, choose disability buy-sell; if it stresses replacing a star salesperson's revenue, choose key person DI.

BOE Reimbursement and Carryforward

BOE is a reimbursement contract: it pays the lesser of actual covered overhead or the monthly maximum, so an owner can never profit from it. Many BOE policies add a carryforward feature that lets an unused portion of one month's maximum offset a higher-expense later month within the benefit period.

Worked carryforward example. A dentist's BOE policy has a $12,000 monthly maximum.

• Month 1: covered overhead is $9,000 (under the cap) -> policy pays $9,000, leaving $3,000 unused to carry forward.
• Month 2: a deferred equipment lease pushes covered overhead to $14,000. The available cap is $12,000 + $3,000 carryforward = $15,000 -> policy pays $14,000.

Because BOE reimburses deductible business expenses, its premiums are tax-deductible and its benefits taxable, but the offsetting deductible expenses usually neutralize the tax. Contrast this with personal DI, where the owner's own salary is replaced and benefits are tax-free if premiums were paid with after-tax dollars.