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What is Business Income Insurance? (And Why You Need It)

Contributor: Amy Tsou, CLCS, MLIS

November 22nd, 2023 | 5 min. read

By Tony Calavitta

What is Business Income Insurance? (And Why You Need It)

When it comes to business insurance, especially in the small business sector, there is a common theme: Uncertainty.

According to a 2023 Next Insurance survey which was recently published in Forbes, a startling 96% of small business owners do not understand the basics of business insurance.

With this statistic in mind, it isn’t surprising that:

And, without proper insurance, even the most unexpected circumstances can have devastating financial and operational implications for small businesses.

Here at Combined, we are committed to changing this narrative – we want to provide you with the information and resources necessary to protect your business with the right commercial coverage.

In this article, we will discuss why business income insurance, though often overlooked in small business insurance plans, is essential to safeguarding your company against unforeseen interruptions.

By reading to the end, you will learn:

  • What business income insurance is
  • Why it’s a must-have form of commercial coverage
  • How to calculate your business income limit to purchase adequate coverage 

What is business income insurance?

Business income insurance is a specialized form of coverage that acts as a financial safety net during unavoidable operational interruptions. In other words, when your business can’t run normally, Business income insurance covers your normal overhead expenses.

This type of insurance is designed to protect against financial losses that occur when routine business operations are compromised due to interruptions like natural disasters, equipment failures, or dependent properties.

Similar to property insurance, business income insurance is triggered by an event that causes damage to your business. But, unlike property insurance which generally only covers physical damage, Business income insurance covers the damage to your business's financial stability that occurs as a result of a triggering event.

For example:

If a fire rendered your office building unsafe to enter and halted your operations, property insurance would protect against the damage to your building, whereas business income insurance would protect you from incurring financial damage as a result of operational shutdown.

Adequate business income insurance allows your business to financially sustain itself during a temporary interruption, like the hypothetical fire mentioned above, until normal operations can resume.

Why do you need business income insurance?

Running a business can be unpredictable.In this section, we will explore the ways that Business Income Insurance ensures that the future stability of your business isn’t.

Running a business can be unpredictable. In this section, we will explore the ways that business income insurance ensures that the future stability of your business isn’t.

Risk mitigation  Anticipating the unexpected

Business disruptions can arise from a variety of sources, often beyond control, that can significantly impact a business's operational capacity. Having business income insurance in place is a proactive way for businesses to mitigate the financial risks associated with these disruptions.

Why? It ensures comprehensive protection, not only against physical damage but also against the financial repercussions of unexpected operational standstills.

Income protection  Maintaining a revenue stream

Business income insurance plays an essential role in safeguarding your business's income during unexpected operational disruptions.

How? It covers the expected lost income when business operations are temporarily halted.

This income replacement acts as a financial buffer, ensuring that your business can weather periods of inactivity without suffering a devastating loss of revenue. It also helps bridge the gap between operations, allowing your business to resume full operations, without financial roadblocks, as soon as possible.

Operating expenses coverage Keeping the lights on

Business income insurance is not just about protecting income flow – it's also about managing ongoing expenses like rent payments, loan or credit installments, and employee salaries, all of which don't pause, even when operations do.

When your business faces an operational halt, these continuous costs can quickly become a heavy burden, potentially jeopardizing your company's financial health.

So? Business income insurance takes over to alleviate this burden.

By covering these essential expenses, this type of insurance prevents your business from falling far behind during downtime.

How to calculate your business income limit

Understanding how to determine your business income limit is essential to selecting adequate business income insurance.

Understanding how to determine your Business Income Limit is essential to selecting adequate Business Income Insurance.

What is a business income limit?

Your business income limit is the maximum amount that an insurance policy will pay out in the event of a business interruption.

This limit is not just a random figure but a carefully calculated number that reflects the potential financial loss your business could face during a period when normal operations are disrupted.

This calculation is based on a formula that involves 3 main components:

  1. Net Income
  2. Continuing Expenses
  3. Extra Expenses.

Let's break down each of these factors.

1. Net Income – Estimating profit during interruption

Net Income is the profit your business would have earned during the interruption period.

Estimating this figure involves analyzing each of the following:

  • Profit and loss statements – This information is vital to understanding your business's revenue streams and expenditure patterns.

  • Historical financial performance – Because records help to identify trends and patterns in income and expenses, this historical perspective is invaluable for estimating future financial figures.

  • Projected future earnings – Your business's growth trajectory and any planned expansions or investments are significant to determining the extent of coverage your business needs.

By analyzing this data, you can accurately appraise the potential revenue your business would lose during a period of inactivity.

2. Continuing Expenses – Identifying ongoing operational costs

Continuing Expenses refer to the operational costs that persist even when your business activities are halted.

It's essential to have a comprehensive understanding of these expenses to receive full insurance coverage for them.

3. Extra Expenses – Understanding additional costs during recovery

Extra Expenses are the additional costs that your business may incur during an interruption to accelerate the recovery process and resume normal operations.

These may include expenses for temporary relocation, hiring additional staff, or costs associated with setting up remote work capabilities.

So, what is the formula for business income limit?

Now that you understand the components involved in this calculation, the formula to determine your business income limit is simple:

Business income limit = Net Income + Continuing Expenses + Extra Expenses

When accurately estimated, the sum of these 3 figures will be the maximum amount that an insurance policy will cover in the event of a business interruption.

Need help estimating your business income limit?

Our commercial insurance specialists, here at Combined, can provide you with additional insights into your coverage needs by:

  • Identifying  risks associated with your business model
  • Suggesting specific ways to mitigate potential financial losses
  • Ensuring a coverage limit that aligns with your business's financial objectives

Schedule a meeting with a team member for business income insurance tailored to accurately reflect your business's unique coverage needs.

Don’t forget to regularly review and update your business income insurance policy

As your business evolves, so should your business income insurance plan.

By periodically reassessing your policy, you can guarantee that your coverage aligns with your current business needs.

To do this effectively, it is important to be mindful of:

  • Changes in business operations
  • Changes in business size
  • Financial deviations
  • Regulatory changes
  • Market Dynamics
To do this effectively, it is important to be mindful of:

Regularly reassessing your policy ensures that your coverage remains aligned with your evolving business needs.

Take the next steps to protect your business with customized business income insurance

If you’re here, you understand the importance of carrying the right commercial coverage for your business.

At Combined, we understand that figuring out what the right insurance plan for your business is can be challenging.

And that’s why we are here:

We want to help you customize an insurance plan that can effectively safeguard your company from any circumstance, no matter how unpredictable.

Schedule a meeting with a business insurance expert today to enjoy the peace of mind that adequate business insurance provides.



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This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.