Business overhead expense (BOE) insurance is unique in its tax treatment:
- BOE premiums paid by a self-employed individual are deductible as a business expense, because they are an expense incurred for the purpose of earning business income.
- BOE benefits received are taxable business income, offsetting the deductible overhead expenses the policy is designed to reimburse.
This is the mirror image of personal disability: deductible premium, taxable benefit. The net after-tax effect is neutral (the benefit funds the deductible expense), but advisors must plan for the tax cash flow during a claim period.