What Is Earnings Insurance

Insurance question - how do I protect my business income?

This is a good question. One of the ways to provide for business income is to have insurance in case disaster strikes. There are two types of earnings insurance. One is if you are unable to work and that pays out to you personally. This is better defined under our definition of Disability. What we will be discussing here is earnings for your business income.

We have given you advice on some other forms of protection you can purchase. Refer to: Gross Earnings. Gross Earnings has a requirement that you purchase the full amount that might be needed for any complete loss. Our goal is to help you understand some of the differences between the insurance forms.

What we are looking at with Earnings is a simpler form of insurance in that there is not a requirement to insure to the full actual extent of a loss. One of the drawbacks to this form is that traditionally it is more expensive.

This type of business insurance would not normally be recommended for a manufacturer or a larger business. This is mainly used by small business owners who are looking for the least expensive method of gaining some form of income protection.

The calculation is determined by the net profits of the business payroll expenses, taxes and interest paid, rents and all other operating expenses of the business. There is no latitude given to you as there is in the Gross Profits form. You do not have the same choice as to what will be insured.

A limitation of this form of insurance is that as soon as repairs are completed the insurance stops. As well, the requirement of due diligence in that you must do everything to rebuild, repair or replace the damaged property is not just limited to you. If the landlord or there is a by-law issue then again, the insurance stops.

The way the policy pays out is a bit different as well. Most pay out 25% or 33-1/3% of the amount insured in any 30 day consecutive period. This is not a guarantee of payout, you must show that each payout is necessary under the loss of earnings amount you have chosen. This percentage is a limitation, not a promise of that much in funds.

These policies usually have exclusions on by-laws, leases and loss of licensing. You would have to pay extra to put these coverages in place for your specific policy.

In a nutshell, the ease of doing this policy with not having to insure to full value has to be weighed against the limitations of coverage and that payments are subject to the limit of 25% - 33-1/3% of the amount you have chosen for any period of 30 consecutive days. You might find yourself coming up short and wishing that you had looked at either the Gross Earnings or Profits form. Talk to your agent or broker about your choices so you do not suffer an unpleasant surprise. Be in control of your insurance!