Editor’s Note: We called in an expert to talking about a bit of a niche that we needed to brush up on – how to “disaster-proof your life” (to blatantly steal a Preet Banerjee phrase) if you’re a self-employed person. Brian Poncelet CFP provided us with the necessary statistics and background information that we required. So big shout out to him!
We chose to focus on two types of insurance of coverage that a self-employed people should consider buying: disability and business overhead insurance.
Personal Disability Coverage
Many of us have life insurance in place in order to protect our loved in ones in a worst-case scenario, but we shouldn’t stop there. The table below demonstrates that the odds of not being able to work because of illness or disability are actually much higher than that of premature death.
Incidence of Disability and Death at Various Ages – Education Committee of Academy of Life Underwriting (2007)
Age Disabled greater than 90 days Disability vs. Death
32 8 per 1,000 8 to 1
37 9 per 1,000 8 to 1
42 11 per 1,000 6 to 1
47 13 per 1,000 5 to 1
52 17 per 1,000 4 to 1
57 21 per 1,000 3 to 1
David Chilton, author of The Wealthy Barber stated, “Disability insurance is the most neglected of all forms of insurance. A thirty-year-old has a one-in-four chance of becoming disabled for one year or more at some point in their life. When people are disabled, they don’t just cease to be an asset to their families, they become a liability.”
Related: Wealthy Barber Book Review
Should you buy group or individual disability insurance? Group DI premiums increase as the employee group’s age rises. However, the premiums for an individual disability policy are fixed for the duration of the policy. Ultimately you have to decide which downside/upside you’d rather live with.
What To Look for in DI Policy
The first thing Brian tells his clients to look for in their DI policy is to make sure it covers up to 65.
There are several coverage types, but the best by far is Own Occupation. This coverage pays if you are unable to perform the majority of duties in the occupation you are trained for. This allows the flexibility to receive the benefit even if you then choose a different career path. For example, a dentist who is unable to work due to carpal tunnel syndrome would receive the benefit even if he had to retrain to become a real estate broker (every dentist’s secret dream).
It certainly helps to become familiar with the following definitions with the realm of disability insurance before trying to choose the policy that is right for you.
Any occupation is typical of many group disability plans. This means that if you could not do your job but could do something else, the benefit payments may be reduced or discontinued.
Regular occupation pays benefits for a defined period after which they will cease if you are able to work in another occupation based on your education, training, and experience.
Waiting period or elimination period is the period between the date the claim is made and the date benefits become payable. For example, a typical waiting period might be 90 days. After 90 days, benefits begin and the premiums paid during the waiting period are usually refunded. The cost for the disability coverage is also affected by the waiting period chosen. Much like car insurance deductibles, the longer the waiting period, the cheaper the premiums.
In addition to those basic coverage definitions, check out these add-ons.
Cost of living benefit is basically a way to protect your policy against inflation. Say for example the base coverage is $3,000 per month but inflation is 3% per year. After seven years the purchasing power of $3,000 per month will only be worth $2,430 per month! This rider keeps pace with inflation by increasing the benefit amount.
Residual disability rider is to insure you if you are not completely disabled, but cannot do many of your duties you could still get a disability benefit.
Future insurability coverage protects you as your income increases. You can get more coverage without a medical at specified policy anniversaries. For example, if you have a back injury that seems to be getting worse, it would be prudent to use the option to top-up your current coverage. You need only prove that your income is higher to qualify.
Return of Premiums allow you to collect 50% of your premiums back every seven years if you have made no claims.
Business Overhead Expense Insurance (BOE)
To qualify for disability insurance you must prove earned/taxable income during the application process. However with BOE insurance, you need to show your business expenses at the time of a claim. Eligible expenses may include mortgage or rent, utilities, cell/office phones, car leases (used for business), professional services (e.g., bookkeeping), salaries for personnel who do not generate revenue and whose duties are vital for business operations, the list is really almost endless. Most small business owners have at least $2,000 in miscellaneous costs every month.
Related: Should You Have Term or Whole Life Insurance?
Policy duration can go to age 70. Benefits are usually payable for 1-2 years after a waiting period. Premiums for BOE insurance are tax-deductible and the benefits are taxable. This means the expenses offset the taxes in almost all cases.
Clearly if you run your own business you’re comfortable with a fair amount of risk in your life, but it’s important to remember that you can’t control all of the eventual outcomes no matter how talented and committed you are as a business owner. Taking steps to protect yourself from an almost-worst-case scenario is something every entrepreneur should consider.