How should a Self Employed Person buy insurance?

by John Klotz

When it comes to purchasing insurance, many self employed consultants are confused as to how they should cover off their risks.  This article will address this concern.

In assessing your insurance needs, you should purchase insurance that covers off a Critical Risk.  A critical risk is a risk that leads to severe financial hardship, or bankruptcy.  You deal with a Critical Risk through Risk Transfer.  With a Risk Transfer, you transfer the risk to someone else, namely an insurance company. If the inevitable happens, they cover your Critical Risk.

A minor risk, such as dent to your car or a cracked windshield, should not be insured, since the ramifications of this incidence, while annoying, are not life altering. 

Since you are self employed, your most Critical Risk would be your inability to earn a living.  If you became disabled, you would not be able to pay your monthly bills. One of your monthly bills would be your premiums for your health and dental plan - which would cancel because you would not be able to make the payments.

So, your first priority should be to purchase an Income Protection Plan, otherwise referred to as Disability Insurance.  If you became disabled, you would receive your monthly paycheque to cover your bills.

Next on the list is life insurance.  If you died, your family would lose your income forever.   Again, you cover this Critical Risk by transferring it to an insurance company through purchasing a life insurance policy.

Thirdly, you need to cover yourself off from expensive drug treatments. If you develop a disease or sickness that requires expensive drug treatments, this could lead to serious financial consequences.  Again, you transfer this risk to an insurance company and, if you develop a disease with expensive medical treatments, the insurance company picks up the tab.  This risk transfer can be satisfied through either a comprehensive drug plan combined with a critical illness insurance policy.

Where this whole insurance discussion about risk transfer falls down is with Dental coverage.  A typical dental plan pays out $600 / year, yet, the premiums cost $50 / month.  Do the math - it's simply a cost savings plan and not really insurance.  Again, the type of insurance you should purchase should pay $10000 for each dollar of premiums which is line with purchasing insurance for Critical Risks.

What you should do with your dental bills is pay them out of pocket.  At the same time, we can discuss a program that will allow you to deduct your payments for your dental bills just like you would deduct any other business expense.  You can create such a deduction through a health spending account, which are available through a variety of offerings.

Ideally, you should consult about your requirements with an experienced insurance advisor who is versed in Risk Management. 

This article was written by John Klotz, BA, CFP, CLU, CH.F.C, RHU, TEP.