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What does self-employment mean to you? Ultimately it means your income depends on your hard work. Your income could be variable and fluctuating. If your family relies on this income, it is ever the more reason to make sure you have the right insurance protection in case the unexpected were to happen? What do you need? In this article, we discuss the types of insurance for and self-employed insurance needs.
The Main Self-Employed Insurance Needs
As a self-employed individual, you definitely need two types of insurance. They are
- disability insurance
- life insurance
Why these? Here’s the reason for disability and life insurance: someone, your spouse and family, for instance, relies on your self-employment income. How would you and your family make ends meet if you could no longer work? What if you unexpectedly died? The stories everyone hears of surviving spouses needing to sell the family home and move are, unfortunately, very real. It doesn’t have to be this way.
Additionally, there are three overlooked, beneficial self-employed insurance needs which fly under the radar. We’ll discuss those further in the article.
What we won’t discuss: commercial liability and property insurance. These types of insurance address self-employed insurance needs as well.
Before we explain disability and life insurance, we need to level set. Compared to your salary-working counterparts, you may feel you are at a disadvantage when it comes to a benefits and insurance perspective. Don’t be. Depending on your circumstance, you may be at a better advantage. Moreover, you will have better control over these benefits. Additionally, as we explain further, those in a self-employed partnership with a spouse or a relative can obtain group coverage (just as your company-working counterparts do).
Disability Insurance For The Self-Employed
Disability income insurance will provide a monthly benefit upon a disability. The maximum monthly benefit depends upon your self-employment income. In order to substantiate your self-employment income, you will need to provide the last two-years of your schedule C income from the 1040 (or a comparable form if the business is structured differently).
The premiums on a disability insurance policy depend on the following:
- your health
- your job profession
- any riders you select
The first one is obvious. Health is a main factor in the underwriting process. Unlike other insurances which offer different health classifications, disability insurance really has only two: standard and rated classification. If you are very healthy, you will receive a standard rate. While that might seem unfair, it will allow you to apply for your maximum monthly benefit and participate in most riders. Conversely, if you are rated because of health concerns, you will be required to pay more. You could also have your monthly benefit reduced and not participate in any riders.
The job profession is not as obvious, but it makes sense why it is included in the underwriting process. Jobs that are higher risk will command a higher premium because the chance of disability is greater. So, all things being equal, someone who is a fisherman will pay a higher premium than someone who works at a desk. However, some carriers will allow a job profession upgrade from a high-risk classification to a lower risk classification if other conditions are met. The moral: don’t fret if you are in a high-risk job classification. More often than not, you could enter into a more favorable classification.
Taxation of Disability Insurance For The Self-Employed
Unlike most employer-sponsored disability insurance plans, the monthly benefit from the self-employed disability insurance is income tax-free. However, the premium is not tax deductible. Does this seem unreasonable? We can tell you that having a tax-free benefit upon disability is much more beneficial than having the premiums deducted on the taxes. In that case, you will have to report the benefit from the disability insurance as income on your taxes. That is not a good thing when you are not working and trying to keep as much income as you can free for your everyday needs.
Life Insurance For The Self-Employed
Another important insurance for a self-employed individual is life insurance. It will pay a tax-free benefit to your surviving family upon your unexpected death. There are so many life insurance calculators available, but they can be too confusing and complex. You just need to cover the income you make and extend it for a number of years for your family to live on. For example, if you make $50,000 from your business and you want your surviving spouse to live on this amount for 5 years, you will apply for a $250,000 life insurance policy.
You will also want to cover any guaranteed business debt or cosigned loans that can be called upon your death. After that, you may want to cover the mortgage on your home, college tuition for your children, your funeral, among others personal preferences. Feel free to use our life insurance calculator for your life insurance needs.
Types Of Life Insurance For The Self-Employed
There are several types of life insurance that are available to the self-employed individual:
(1) term life insurance is by far the least expensive, but will provide a death benefit only, and only within the term of the policy (ex: 10, 15, 20, or 30 years). Term is best to cover unexpected death
(2) conversely, permanent insurance is best to cover for permanent needs. For instance, since most people don’t know when they will die, permanent insurance usually is best in business tranfer situations. You could die long after a term policy expired.
Unless you need coverage for permanent needs, you will want term insurance. This is the least expensive type for the amount of death benefit. Some term plans offer disability insurance and critical illness riders. While these riders can be advantageous, our experience is that separate policies may allow for better coverage.
We do need to expound on the business transfer idea. Most likely, at some point, you will want to sell your business to someone else. An often overlooked use of life insurance is using it as the business transfer mechanism. For instance, if you have identified a person to purchase your business, but die unexpectedly, the value of the self-employed business becomes ownership to your surviving spouse. A significant transfer problem can exist if the other party/buyer does not have the funds or money to purchase the business from your surviving spouse. If a life insurance policy was established, with the death benefit as the agreed purchase price and the buyer as the beneficiary, the buyer would have the money to pay your surviving spouse. The business transfer is much more efficient and frankly, easy.
Obtaining Guaranteed Coverage
You have options. You can obtain guaranteed life and disability insurance coverage if you are in business with another person. This other person can even be your spouse or relative. There are dollar limits to the coverage as well as limits on the profession. However, no medical exam is required. Additionally, a MIB report is only required if the applied coverage is above certain dollar limits. You might be thinking this option could be expensive. If you have read our articles on guaranteed life insurance, you know coverage can be more expensive.
This is different. It is group coverage, and that means underwriting is different. Cost is generally reasonable. Take advantage of this if you can. Contact us to find out more.
Three Overlooked Insurance Policies For The Self-Employed
There are three overlooked, yet extremely beneficial policies, designed for business owners including the self-employed. They are:
Business Overhead Expense (BOE) insurance – this is a disability insurance policy which will pay your business’s monthly expenses upon your disability. Contrast this to a typical disability insurance policy which will pay your income. This BOE policy is important because it will keep your business solvent as you manage through your disability. Rent, suppliers, utilities, and payroll can still be paid. Additionally, the premiums on this type of policy is tax deductible. If structured correctly, the benefits can be tax-free – just like a typical individual disability policy.
Next is a traditional long-term care policy. Approximately 7 out of 10 people aged 65 will have a long-term event in their lifetime. While many people want to ignore this policy because of the potential high premiums, the probability of needing future care is real. The good news is that business owners have an advantage: they can deduct the premiums, up to a certain limit, directly on their taxes as an above-the-line deduction on their1040 tax form. They can even deduct their spouse’s premiums as well. Contrast this to the typical worker who can deduct this expense only on schedule A and only when premiums exceed 10% of AGI (7.5% if age 65+). This is a huge benefit for business owners for this important coverage.
Have You Ever Been Sick?
You have been sick, right? Maybe the flu? As a self-employed individual, you probably felt the need to keep working. You can’t afford to take time off from work and not have money coming in. Now there is a way to take time off to take care of yourself and still be paid! There are self-employed sick pay plans which will cover sicknesses, injuries, and significant illnesses up to 6 months. So, if you are out with the flu for 2 weeks, you will receive a benefit. These insurance plans act similarly to short-term disability plans, which you can really only obtain if you worked for an employer. Benefits from these sick-pay plans are income tax-free.
We hope you can see that your self-employed insurance needs are covered. Life and disability insurance should be the foundation of coverage. Once these insurances are in place, you can focus your attention to other beneficial insurances, if desired. Two other types of insurance you could utilize are accident insurance and critical illness insurance. Although we did not discuss them in this article, you should be aware of the many options when it comes to your self-employed insurance needs. Reach out to us if you have any questions or concerns. We have helped many self-employed individuals determine the right solution for their insurance needs.