Owning your own business means the sky is the limit for what you can earn. It also means you’re taking on a fair amount of risk. Business owners should do everything they can to mitigate their risks. That means being adequately insured against the risks of getting sick, missing work or suffering property damage.
Below is an overview of common types of insurance for self-employed professionals.
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Health insurance for self-employed
Self-employed individuals typically don’t have access to private group health insurance policies. An option arose for self-employed people when the Affordable Care Act passed in 2010.
The law created the Individual Health Insurance Marketplace, which enables people to enroll in individual health insurance plans. The marketplace considers you self-employed if you have a business with no employees. You can enroll through the marketplace if you’re a freelancer, consultant, independent contractor or another self-employed worker. What you pay for health insurance through the marketplace is based largely on your income; therefore, you can find an affordable plan for your budget.
Once you have an employee, you can’t get health insurance through the Individual Marketplace. But you may be able to use the SHOP Marketplace for small businesses to offer coverage to yourself and your employees. Typically, you can sign up for a new health insurance plan during the open enrollment period, which happens every Nov. 1 through Dec. 15. If you have had a qualifying life event, you can also enroll. Qualifying events include getting married, having a baby or losing your previous health insurance.
The Affordable Care Act now allows a 100% self-employed health insurance deduction on premiums. This means that you can reduce your adjusted gross income by the total amount of health insurance premiums you pay in a calendar year.
Disability insurance for self-employed
If you’re a self-employed business owner, you have two big reasons to invest in disability insurance. First, an injury or illness can prevent you from earning an income from your business activities. Second, you may need insurance benefits to keep your business afloat while you recover from your disability.
The most important elements of disability insurance for self-employed workers are:
- The occupational class for your profession
- The definition of disability
- How the insurer determines your income
The definition of disability is the most important factor to consider when shopping for long-term disability insurance. This will determine how much, and even if, you collect benefits following an injury or illness.
A policy’s definition of disability is based on your capacity to work. To collect on a claim, you must meet the policy’s definition of disability. This can vary greatly by company and policy. The broader the definition, the more insurance will cost.
Your career also has a major impact on your premium rate. Insurance companies classify jobs based on the hazards of the work, as some are more prone to injury or illness. Your career may also be assessed based on the difficulty in returning to work from an injury or illness. The more difficult it is to do a job with certain injuries or illnesses, the more the insurance company might have to pay in benefits.
Different jobs are grouped into specific risk classes. These are numbered on a scale of 1 to 5 or 6. Typically, the higher the number, the less risk an insurer considers that profession. The lower the risk, the lower the premium rate. When you compare policies, you should note that insurers assign different risk classes to the same profession. One insurer may designate a job as a 4, while another may classify it as a 5.
The premium you pay for and the benefits you receive will also be based in part on your income. A key part of the underwriting process when you apply for coverage is determining how much you earn. An underwriter will evaluate your earned income, unearned income, net worth and even your bankruptcy history, if applicable. You will have to provide the underwriter your individual tax returns and business tax forms.
For underwriting purposes, income is earned if it stops or would be significantly reduced because
of a disability. Therefore, investment or business income that doesn’t require work on your part will not be factored into your financial underwriting.
If you’re a full or partial owner in a business, the insurer’s underwriter will determine your income based on:
- The legal structure of the business
- How much of the business you own
- Its earnings
- How much you work/earn as an employee of the business
In addition to replacing your own income with disability insurance, you may need a business overhead expense policy for your business. Business overhead expense (BOE) insurance helps cover your monthly business expenses if an injury or illness impacts your ability to work. The typical maximum monthly benefit is between $15,000 and $25,000. The amount the policy pays in benefits will be based on the company’s monthly overhead expenses each month, up to a cap.
You can obtain BOE coverage as a standalone policy or by bundling it with your personal disability policy.
Learn More: Disability insurance for self-employed individuals
Life insurance for self-employed
For small business owners, life insurance can meet a number of needs. If you die unexpectedly, the death benefit can replace your income that would be lost. Life insurance helps the survivors pay bills, cover debts and pay for funeral expenses. Life insurance can also help ensure the continuation of your business if you die. The policy’s death benefit can cover the expenses needed to recruit a professional to manage the business in your place.
If you’re a partner in a business, life insurance can also provide the funds needed for the remaining partners to buy your share from your estate. And if the transfer of your business to heirs might incur an estate tax, a life insurance policy can help your heirs pay that bill.
Learn More: Life insurance for self-employed individuals
Dental insurance for self-employed
Dental insurance is one of those benefits that many self-employed people opt to do without. Seeing a dentist isn’t as much a priority as other health care needs. And even if you do get a checkup once or twice a year, many people are fine paying that expense out of pocket and hope they never need more extensive treatments.
But you don’t need to skip dental insurance just because you’re self-employed. There are a number of individual private plans available that cost between $15 and $50 a month. Individual dental plans cover preventative care, as well as procedures ranging from extractions and fillings to root canals and dentures.
When you look for dental insurance, evaluate plans based on:
- The total monthly premium.
- Copayments required for each treatment.
- The deductible you’ll have to pay before benefits kick in.
- The amount of coinsurance, which is the percentage of each treatment you’ll have to pay out of pocket.
- Any exclusions on the policy.
- Whether the policy has a waiting period, in which you’ll have to pay full premiums for a set period of time before you can use the policy benefits.
Liability insurance for self-employed
Self-employed professionals should consider two types of liability insurance: Professional liability and general liability.
Professional liability, also known as errors and omissions insurance, covers you if a client claims you were negligent while working for them. Professional liability insurance can help reimburse a client who makes a claim of negligence against you. It can also cover your legal costs.
Every business, even those that are home-based, also needs general liability insurance. This coverage protects against financial loss as the result of bodily injury, property damage, medical expenses, libel, slander, defending lawsuits and settlement bonds or judgments.
Not having either of these coverages means you would have to pay the costs of liability claims out of your own pocket. Depending on the damage caused, these claims can cost figures or more to settle. One liability claim could bankrupt your business.
Workers’ compensation insurance for self-employed
If you have employees, you need workers’ compensation insurance. In fact, it is required by law. Some states even require that businesses provide workers compensation coverage on independent contractors working for them.
Workers’ compensation insurance covers the business and its employees in the event they are injured on the job. For employees, it covers lost wages, medical expenses and a death benefit if death resulted from a workplace incident. It also helps protect you and the business from legal actions taken as a result of workplace injuries.
The benefit amount will depend on your state, the affected employee’s salary and the extent of their injuries.
If you’re a sole proprietor, your state may not require that you have workers’ compensation coverage. However, you may need to provide proof of coverage if you work as an independent contractor for a business or client that requires it.
In addition, health insurance policies typically do not cover work-related injuries and illnesses because those costs should be borne by a workers’ compensation policy. Therefore, if you’re self-employed and get hurt while working, your individual health insurance policy may not cover your medical expenses. Therefore, self-employed workers should have both health insurance and workers’ compensation insurance.
Business owners and contractors that have paid for workers’ compensation insurance can access wage replacement benefits if they are injured while working. In many states, you can buy workers’ compensation insurance from a private carrier or through a state-funded program. There are a few states — including North Dakota, Ohio, Washington and Wyoming, — that have only state-funded workers’ compensation insurance. If you don’t have employees, you may be limited to buying a state-funded policy. That’s because private carriers typically will not cover a single employee or worker.
Learn More: Workers’ comp vs. disability insurance
Unemployment insurance for self-employed
Unemployment insurance is a joint program between the federal government and state governments. Each state administers an unemployment insurance program that must follow guidelines outlined and enforced by the U.S. Labor Department.
Each state’s unemployment program is funded by a tax that is deducted from an employee’s paycheck. There is no insurance policy to buy, either by employers or employees, to pay for unemployment benefits. States determine unemployment insurance benefit amounts based on multiple factors, including past earnings.
By paying the unemployment tax, employees can receive unemployment benefits if they meet their state’s eligibility requirements. Sole proprietors, independent contractors, freelance workers and business owners are not eligible for unemployment during normal circumstances because they do not pay unemployment taxes.
However, if you structure your business as an S Corporation, you may be able to collect unemployment benefits if you meet your state’s eligibility requirements. Under an S Corporation structure, you treat yourself as an employee of your business. You receive a paycheck from your business that deducts federal and state taxes, including unemployment taxes.
Self-employed workers have also been able to collect unemployment benefits through the CARES Act, the law designed to help Americans financially through the COVID-19 pandemic. The law allowed states to pay unemployment benefits to self-employed people for up to 39 weeks. This program ended July 31, though some states have already cut off benefits.
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This article originally appeared on MeetBreeze.com and was syndicated by MediaFeed.org.
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