Our February Newsletter covered the definition of risk management and its various aspects. For May we thought we would delve into the nature of available insurance coverage for all families, yet especially for the self-employed. More households are moving towards income autonomy. This is exciting, and potential awaits, yet we need to all consider a safety net and what that could look like.
So, for example, after four years of volatility, corporate restructuring and increasingly demanding workloads, the risks of running Me Inc. don’t seem so bad.
Sometimes by design, sometimes by necessity, more people are becoming self-employed entrepreneurs, leaving behind the relative safety of the cubicle farm.
Currently, about 15 per cent of Canada’s work force is self-employed. Their ranks have been steadily growing, rising to about 2.7 million in 2011, from 2.3 million a decade earlier, according to Statistics Canada.
A CIBC study conducted in June found that more than half a million Canadians said they had begun their own businesses over the past two years – a record number, and a majority made the leap by choice, Canadian Press reported.
Let’s say you’re among this growing group – finally in the driver’s seat. Things are going great. You’re busy, the bills are getting paid, and you are juiced up with the energy of a mover and shaker.
And then you get sick. Or worse, you are in an accident that renders you disabled. Not only have you lost your ability – perhaps permanently – to bring in an income, but you probably have a pile of new medical expenses to manage. There are a lot of tax and other advantages to self-employment, but creating a safety net of benefits for you and your family is one big disadvantage compared with the security offered by large employers. But this is a necessary task that many self-employed are too happy to put on the back burner. It has become apparent that the age of self-employed entrepreneurs determines how seriously they approach the challenge. “Those who are 40-plus would tend to be very responsible about life insurance and disability insurance,” he said. “My experience with most younger people is they think they are bulletproof.” One question worth asking is:
How do you plan to live if you can’t earn an income?
We usually recommend a layered approach to a self-employed benefits package that can be expanded as you get older, your family expands and your business grows.
For example, a 30-year-old consultant or contract worker doesn’t need an extended health plan covering dental or eye care. While these costs can be expensive, they won’t hurt their ability to make a living. The first layer should contain Life insurance for a mortgage liability and possibly long-term planning in and out of a corporation, disability insurance, followed by critical illness insurance.
Once these elements are settled, self-employed entrepreneurs should aim to bolster their retirement savings (utilizing corporate strategies that are most suitable) and, if necessary, line up extended health-care benefits as they get older, such as dental care and prescription coverage.
Disability insurance
Disability insurance is not cheap, and to make matters worse, premiums are not tax-deductible in most cases for self-employed entrepreneurs. Fortunately, in most cases, benefits are tax-free. He is a range of recommended disability coverage scenarios for healthy non-smoking self-employed entrepreneurs and their costs:
– A 30-year-old single woman freelancer who rents with an annual income of $60,000 a year can pay a monthly premium of $182 for a monthly benefit of $3,400 up to age 65. – A 35-year-old married man who is a consultant, with no children, and co-owns a condominium with an annual income of $95,000 a year can pay a $140 monthly premium for a $4,900 monthly benefit up to age 65. – A 40-year-old married woman with a home-based business, two children, co-owns a home with a husband making a good salary, and a total household annual income of $225,000 a year can pay a monthly premium of $368 for a monthly benefit of $5,900 up to age 65. – A 50-year-old married man with two kids in university, who co-owns a home and is well-established as a consultant making $200,000 a year can pay a monthly premium of $425 for a monthly benefit of $8,080 up to age 65. – A 55-year-old married man who was just bought out for $120,000 to leave his high-paying job, no longer has dependents at home, has only a very small mortgage on the house he co-owns with a wife who works part-time, and expects to make $100,000 a year providing professional services such as accounting. This new entrepreneur can expect to pay a monthly premium of $523 for a monthly benefit of $5,100.
All of these scenarios include a cost-of-living benefit, which means the benefit increases with inflation during the disability. In addition, policy holders can raise their coverage as their income increases without medical evidence, as well as limit the benefit period below age 65 to lower premiums. Life insurance
When considering life insurance benefits, often married self-employed entrepreneurs with dependents should consider to secure eight to 10 times their annual income. “In our world, you’re going to have a transition period in which a spouse is going to have to go back to work after the death of a loved one.” Critical illness insurance
Critical illness insurance is a fairly new product popular with self-employed people. Essentially, it provides a lump-sum payout from $50,000 up to $2-million depending on your coverage if you’re diagnosed with one of the conditions covered under the policy, including various forms of cancer, heart ailments and chronic diseases. Monthly premiums for a $100,000 critical illness benefit range from about $35 for younger people to $75 for those over 40, with an option to lock in set premiums up to a certain age.
There are also fabulous options with a return of most or all premiums paid after 15 plus years. If corporately structured with a shared ownership, then those premiums represent a forced savings and can then go to the family environment tax free after those 15 plus years at any time. This creates in effect, NetZero cost of insurance. Retirement planning
When it comes to retirement planning, many entrepreneurs – especially professional consultants with their own client base – assume they can sell their incorporated business to a competitor and retire on the proceeds. Yet a big part of that business is you, your network and your expertise, and it loses most of its value when you are not around any more.
If you get something for the business, that’s fabulous. Just don’t shortchange yourself in contributing to a pension plan or strategy on the assumption that will occur. Other measures
There are some good practices and less-expensive options self-employed people can take to protect themselves in the event of a short-term illnesses or disabilities without a comprehensive benefit program.
It’s a good idea to have at least three months worth of easily accessible cash available to cover basic living expenses for health emergencies. Participating Whole Life policies or a tax-free savings account is a good place to keep your rainy-day fund.
Another option is a healthcare spending account through a benefits supplier. An HSA allows you to contribute whatever you want to the account and deduct it from your taxes. Medical expenses are paid by the benefits supplier through your account.
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