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How Should a Self Employed Consultant Purchase Insurance?

How should a Self Employed Person buy insurance?

Written By: John Klotz
4-2-2009

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.
John is a Risk Management and Wealth Creation Specialist with Northwood Mortgage Life.
You can reach John at john.klotz@northwoodmortgage.com or call (416)-969-8130

  1. Past Comments
    Past CommentsDec 21, 2011

    Ah, i see. Well that’s not too tricky at all!

  2. Past Comments
    Past CommentsOct 11, 2012

    This forum needed shaking up and you’ve just done that. Great post!

  3. Past Comments
    Past CommentsDec 01, 2012

    Honestly, the younger you are when you purchase Life Insurance, the better it is. You could buy an Universal Life Insurance Policy. This is what I call Insurance as an Investment . If you die, your Spouse and future family are taken care of; if you don’t die, you could be enjoying a Tax Free Source of Income at retirement. Let me explain.You would pay a regular premium payment per month or per year. You would have an Investment Portion of your premium growing Tax-Deferred (No tax paid on the cash growing) inside your Insurance Policy. Then, when you want to retire, take your policy to a Bank and get a loan for up to 90% of the cash inside. You use the Cash inside your joint insurance policy as collateral, and now the Loan is a Tax Free Source of Income at Retirement (or earlier) in combination with things like a pension and RRSP’s. I do this every day for my clients

  4. Past Comments
    Past CommentsAug 23, 2013

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