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Overhead Insurance

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  • Overhead Insurance

    This is the first time I am posting to a forum, so bear with me if I inadvertently make a faux pas.  I am a sole proprietor of an oral surgery practice.  I opened the practice at the end of 2011.  At that time, I was heavily in debt (about 225k of student loans and the business startup loan of about 535k in addition to 150k for a consultant).  I had not much in liquid savings and so took out two overhead policies for the practice. To this day, I am personally insured with both disability and term life insurance.  I obviously need to keep the personal disability and the term life, but am wondering if it is time to cancel the business overhead policies.  The first one has a monthly premium of 133.47$, a 60 day wait period, a aggregate benefit amount of 128,136 (about 10k a month for 1 year). The second policy has a monthly premium of 176.68, although I get a yearly dividend check of between 400 and 500$ back.  It has a 30 day wait period and a 15k monthly benefit to a maximum aggregate benefit of 180k.

    The interest rate on the student loan is only 2.62% so I did not prioritize it and currently owe about 200k in principle.  The business loan was initially 6.5% which I refinanced this year to 4.5%.  I currently owe about 295k on that. I paid the consultant in full.

    The only personal loan we have is the mortgage, which we are in the process of refinancing to a fixed 15yr at 3.65%.  The principle is about 606k.  My yearly income fluctuates, but is about 530k after expenses.  My spouse has an income of about 55k. We maximize our 401k contributions through the office.  That comes to about 73k a year.  Monthly personal expenses are about 15k (that includes mortgage and stud loan payment). We could scale that back to about 9k without too much trouble, if really necessary.  We also manage to save about 90k in after tax accounts.

    Monthly business expenses are about 20k (supplies would not be necessary to purchase, so that basically covers business loan, payroll, rent, phones, internet).  I don't have a huge liquid fund for the office, just about 20k set aside for emergency.  I do have 100k in a savings account as a liquid asset for personal emergency.  As sole proprietor, I could always loan the office money if necessary.  If I stopped working tomorrow, we have about 30k-40k that would be paid to the office in med/dental insurance (our accounts receivable) over the next 4-6 weeks.

    Is it time to cancel one or both overhead policies and self insure?  How much should I keep liquid if I do cancel the overhead policies?


  • #2
    Welcome to the forum - glad you posted! Your question is difficult to answer without a plan in place (of course, you're hearing this from a financial planner  :roll: ) but there are many moving parts which include a combination of business and personal finances. Here are some thoughts:

    • It seems to me that the BOE policy is redundant if we can assume that you are adequately covered for OO disability. Have you coordinated with your agent to determine that the payout would not be reduced by your primary OO policy? I haven't priced a BOE policy, but they seem to be rather costly, too.

    • BOEs pay overhead costs, but do not replace income. I believe a good substitute might be a BOP, or Business Owner's Policy, which would cover temporary loss of income from events other than disability. They are less expensive and would allow you to continue paying your overhead until you were able to open your office again.

    Keep up the good work with your finances! You have made a lot of progress in 6 years.
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3
      Thanks for your reply!  I never heard of a business owner's policy, but it seems like it might replace not only the two overhead policies, but also the general liability insurance policy that I forgot about (but also pay for).  I also did not realize that the payout of one policy could affect the payout of another.  Part of the problem is that I do not have a single insurance agent and have been picking up policies all over the place as the years go by.

      Thanks for the encouragement!  Sometimes it feels like the more I pay back, the more I owe .


      • #4
        I think you will incorporate the BOP with your general liability policy. This is a topic for a good insurance agent and you should get a couple of quotes from one who is knowledgeable about this kind of policy, even better if s/he has a lot of policyholders in a similar situation.
        Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


        • #5
          I had office overhead policy for many years.  I think this makes a lot of sense for a solo practice.  If for some reason you are unable to work the overhead still has to be paid.  I used it after a tornado hit my town.  We could not see patients for about 5 working days because of no electricity.