A Discussion No One Wants to Have…
Most advice for the self-employed has to do with increasing profits, but you also need to create security for yourself.
Insurance, everyone’s favorite topic. ‘Why not start talking about root canals or flooded basements, Ryan.’ I assure you, this will be a short-and-sweet, down to the nitty-gritty of what you need from a business standpoint, and little else, so stick with me.
The thing is, when it comes to insurance, it’s important to understand what you’re getting and why. I’m not an insurance salesman. As a fee-only financial planner, I don’t get a dime for suggesting insurance. But there are certain situations in life where insurance is needed. And one of those situations is when you’re self-employed or working for yourself.
While much of the advice to this point in outlining steps as you become self-employed has been about how to maximize your profits, this week we’re going to delve into how to protect yourself. Since self-employment inevitably comes with risk - will clients call you, will you be able to charge enough to cover your costs, how will people find you - there’s also a need to also create cover for yourself, if something tragic occurs. That’s where insurance, particularly long-term disability coverage, comes into play.
But to make it easy, I’ve separated it into quick dos and don’ts. So you don’t have to read much about disability or other insurances. Instead, you can get a broad stroke and then move on with your day.
Do: Buy long-term disability insurance. This protects you for years, in case you suddenly can’t work. Since you have no other backstop provided by a company, you have to do this yourself. Typically you want to cover 60% of your current income.
Don’t: Buy short-term disability insurance. Instead, try to plan for it. Have six months of expenses built up, so you can cover costs if something happens. This will save you long-term.
Do: Ensure you buy own occupation disability insurance. This allows you to be covered if an injury or accident prevents you from working your own job. Without it, you may not get coverage once you can work any job. But as a professional, any job may or may not cover your costs.
Don’t: Write-off the long-term disability for tax purposes. If you do need the payments, then when you receive them, you will have to pay taxes on the payments. But, if instead, you buy the insurance under your own name (not your company name) then you can avoid taxes on the payments since you can’t write them off as an expense today.
Do: Buy industry-specific coverage that you might need for liability protection. If you’re a lawyer, for instance, malpractice insurance may be needed. Same for a doctor. Each industry has specific needs, but you should only consider what’s typical for your field.
There, that’s the whole insurance discussion for the self-employed. Not too bad, right? (This doesn’t get into life insurance, since that’s more of a family-planning topic.) The less insurance you’re discussing the better, since most aren’t worth the time or money.
But protecting yourself isn’t a matter of business. It’s a matter of necessity. And having basic, own occupation long-term disability coverage is where to start, as you kick off your self-employment. You may need to increase coverage as your business grows, since your expenses could increase as well.
That’s a good problem to have, even if you have the same rolled-eyed response to the insurance discussion down the line. It just means you’re human, since who wants to talk insurance!
Some extra Solo links:
Can you name your income? For the self-employed, there might be a few different ones. Here’s a good rundown of the different income types. (Yahoo!)
Could a self-employment rush soon come? One-in-five US adults have considered leaving their job to work for themselves in the past year. (Honeybook)
Paying your taxes on April 18? Don’t forget this other tax deadline: your first estimated tax payment for 2023. (US News)