Admit it. You’ve thought about going it alone.
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.
Gavin Laws of Laws Benefits Inc. has been advising companies and individuals on how to structure their benefit programs for 35 years. In that time, it has become apparent to him 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.”
Mr. Laws asks his new clients one simple question: How do you plan to live if you can’t earn an income?
“I don’t hit people over the head. I just ask the question,” he said. From that point, a plan is developed.
Mr. Laws recommends 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 disability insurance, followed by life insurance, then critical illness insurance. Once these elements are settled, self-employed entrepreneurs should aim to bolster their retirement savings and, if necessary, line up extended health-care benefits as they get older, such as dental care and prescription coverage.
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. Mr. Laws provided 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, according to Mr. Laws. 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.
When considering life insurance benefits, Mr. Laws advises married self-employed entrepreneurs with dependents 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,” he said.
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.
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.
“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,” Mr. Laws said. “If you get something for the business, that’s fabulous. Just don’t shortchange yourself in contributing to RRSPs or a pension on the assumption that will occur.”
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. 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. Like an RRSP, 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. But unlike an RRSP, the withdrawal is tax-free.
Beginning this year, self-employed people can access federal Employment Insurance benefits if they are suffering from an illness or taking a leave to care for a newborn or a sick family member.
The downside of these new rules is that you have to pay EI premiums for a year before you can access these benefits, and you have to pay both the employee and employer premiums.
Unfortunately, the maximum EI benefit available to self-employed people is about $470 a week, and only for 15 weeks. And in case you’re wondering, no, you cannot lay yourself off.