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Edited by: Kimberlee Leonard
 and Reviewed: Kimberlee Leonard

How Much Business Income Coverage Do You Need?

Author: | Aug 17, 2023

Editorial Note: We earn a commission from partner links on Go Sifter Advisor. Commissions do not affect our editors’ opinions or evaluations.

Almost all of us faced a loss of business income during COVID due to disrupted supply chains and nosediving demand for products and services. Businesses found it hard to retain employees and pay utility bills and rent.

But this was an extreme case. Loss of business income could happen due to various other reasons, such as political turmoil, theft, fire, and natural calamities such as hurricanes and floods. 

This is where the business income coverage comes to the rescue. If your business operations are on hold for repairs, this coverage helps cover the expenses during this time. This article will enhance your understanding of the factors that can disrupt your business and calculate business income insurance.

Projections Required for the Insurance

To calculate the loss of income, you first need to know the income projection for a given year. The maximum an insurer will reimburse you is equal to the annual income of the business. You must consider these factors –

  1. The amount of income your business will generate over the next year or the estimated future revenue.
  2. The amount you may need after physical damage to the property or any other disruption that forces the business to temporarily shut down.
  3. The time you will need to carry out the restoration or to get the business up and running again.

It is not easy to make these projections as they need a strategic approach. To make accurate projections, you not only have to consider all the possible scenarios of business disruption but also the impact on clients and all the stakeholders.

Briefly speaking, the business income is a sum of the following –

  1. Net income of the business before you pay the income taxes.
  2. Operating expenses that continue after the business disruption, including salaries, utility bills, and rent.

Let us understand business income insurance calculation in detail.

Calculating Business Income

Use a business income worksheet by the Insurance Services Office (ISO) standard or by your insurer to assess the loss of income. It gives a step-by-step approach to calculating and projecting next year’s business income. If the business income sheet seems too daunting, ask for help from your accountant.

These steps demonstrate how to calculate business income for insurance –

  • Step 1: Calculate your previous year’s revenue.
  • Step 2: Write down your current year income projection.
  • Step 3: Subtract the operating costs and business expenses from the gross income.
  • Step 4: Figure out the net income after tax.

This is the income that could be at a loss for which the insurer will be willing to compensate.

Once you project the income, understand the extent of loss and the cost of restoration. For example, areas that are highly susceptible to hurricanes in the US would need to calculate the time it takes for the roads to clear and for building contractors to start running before they can supply manpower and equipment to rebuild the site. They also need to consider the time it will take to transport the repair equipment and material to the site by road that could be already damaged.

What Does Business Insurance Cover?

Loss of business includes direct sales, payroll, taxes, utilities, rent, cost of licenses, and much more. You need to break down the loss of income under each of these sections to understand what the business insurance will cover.

  1. Taxes – If the disruption forces you to close just before the tax payments are due, you could incur penalties. Business income insurance will help you cover these.
  2. Payroll – It is not easy to find the right employees, and you do not want to let them go due to a temporary disruption. The business income insurance will help you pay the salaries.
  3. Utilities – Even if the business is shut down, you may still need to pay a fixed amount for the water, electricity, and gas supply.
  4. Lost profits – If the disruption happened during your peak season, the lost profits could be higher than usual.
  5. Contractor payments – Your contractors could be a remote accounting team, advertising agency, development center, etc. The business income insurance will help you honor your payment commitments even if there is a disruption.
  6. Mortgages or rent – If you rent the building or have a loan running, the insurance can cover the payments till the time the repair is complete.

What Will My Business Income Insurance Cost?

According to a leading insurance provider, the average cost of a business income or interruption insurance is between $40 and $130 per month. The main factors that help in calculating business income insurance –

  1. Industries such as food and beverages, especially restaurants, chemicals, and oil & gas, are likely to face more business disruption and may pay a higher insurance premium.
  2. Revenue – The higher the company’s revenue, the higher the insurance premium.
  3. Property value – Large factories may pay a higher insurance premium due to the high value of their property assets. Compared to this, a restaurant may pay a smaller premium.

Frequently Asked Questions

How do I calculate business income?

To calculate business income, follow these steps:

  1. Determine total revenue by adding up all the money earned from sales or services.
  2. Identify the cost of goods sold (COGS) if applicable.
  3. Calculate gross profit by subtracting COGS from total revenue.
  4. Deduct operating expenses to calculate operating income.
  5. Account for other income and expenses that are not part of regular operations.
  6. Determine net income by adding or subtracting other income/expenses from operating income.
What does business income include?
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