Business income insurance, also known as business interruption coverage, protects your business by covering lost income and additional expenses when your business is shut down from a covered loss.
The business income covered is what your business earns as taxable income, which includes any income that results from business activity. Damage from fire is an example of a covered loss, and business income insurance would help cover lost income while the business is closed due to the covered loss. Additional expenses you face while shut down may also be covered. For example, if you incur extra expense because you are forced to relocate the business after a covered loss.
Business income coverage helps cover:
- Lost profits.
- Mortgages or rent.
What is a covered loss?
Covered losses typically include theft, fire wind, falling objects or lightning
. A loss is triggered when physical damage occurs. Business interruption covers your lost income while your property coverage
reimburses you for the actual physical damage.
Keep in mind that standard business interruption coverage does not cover utility interruption
, which may occur due to wind storm, water main break or gas leak. For example, when recent winter storms in Texas forced many businesses to remain closed due to loss of power and water, this was not a covered loss. Read more here.
An endorsement called Off Premises Utility Coverage
needs to be added to cover losses due to interruption of power, water, gas, or telephone service, due to direct damage that occurs at a location other than your premises.
How to Calculate Business Income for Insurance
As a business owner, you will want to know how to calculate your Business Income so that you understand if you have enough coverage to keep your business going.
Steps to Calculate Business Income
- Calculate total revenue. (This includes all items and services you sell at your business.)
- Subtract expenses and operating costs from total revenue. (This is your earnings before tax.)
- Deduct taxes from earnings before tax. (This is your business’s net income, which will be your business income.)
Business Income = Total Revenue – Expenses – Taxes
Although your business’s sales will constitute most of your business’s income, keep in mind that any income you receive that relates to your business is considered business income.
How do I know if I have enough coverage?
- Calculate how much income your business generated in the previous 12-month period.
- Estimate your income for the future 12-month period to reflect expected increases or decreases over the coming year
- Estimate the period of restoration. This should be based on a worst-case scenario.
Underestimating the restoration period may save you on premium now, but this can be a costly mistake later. For example, if your policy gave you 2 weeks of coverage and then was closed for 2 months or longer due to a covered loss, your business could face seroius financial hardship.
Determining a realistic restoration period depends on your industry and the types of covered losses you are likely to face. If you aren’t sure how many weeks of restoration you have in your existing coverage, we can help you figure that out and make sure you have the coverage you need.