Insurance for self-employed Canadians: What coverage do you need?

If you are self-employed, the onus for insurance coverage is squarely on you. If you are considering self-employment or are already self-employed, consider whether the following types of insurance apply to you. 

Life insurance

If you have a spouse and/or children who rely on your income, you should probably have life insurance. It could replace that income if you were to die, protecting your family from financial hardship. 

How much life insurance do you need? 

You need enough life insurance to cover your financial obligations—such as a mortgage and personal debt—and provide sufficient care for your dependents.

Although a family’s expenses could decrease if someone died, most households have lots of fixed expenses like rent, mortgage payments, property taxes, insurance, utilities, children’s expenses, and other costs that do not change if there is one less family member. In some cases, a family’s expenses could even increase to account for additional help like a nanny for little ones or other help around the house.

A business owner may also consider life insurance to provide cash for their business to keep operating. If the business’s value could be impaired by their death, a life insurance policy paid for and owned by the business could provide the funds to hire a replacement or shore up cash flow.

Some business partners agree to have life insurance on each other. This coverage can provide funds for the survivor(s) to buy the deceased partner’s share of the business from their family. 

When you buy life insurance, you can buy term life insurance that covers you for a certain number of years, or you can get permanent life insurance that is notionally meant to keep forever. Permanent insurance contains an investment component, whether it’s whole life or universal life insurance. Premiums tend to be higher for permanent coverage since the risk of death rises with age. But term insurance generally has a renewal feature, whereby you can renew at progressively higher premiums for subsequent terms.

Business owners with corporations are often pitched life insurance as a tax and investment strategy, especially whole life and universal life insurance. These policies generally have high monthly premiums and are meant to provide future retirement income or a larger estate value.

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Corporately owned life insurance definitely reduces tax because you are putting money into a life insurance policy instead of into corporate investments, which generally produce taxable income. But the trade-off may be higher fees than comparable investment options. As a result, you may not be further ahead.

It is also important for business owners to consider other tax-efficient saving options like registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs). If RRSP and TFSA accounts are not maxed out already with a reasonable expectation that maximum contributions can continue, a corporate life insurance policy for any reason beyond risk management—that is, for tax and investment reasons—should be considered with caution.

Corporately owned life insurance can be a great opportunity for someone who has more money in a corporation than they are ever going to spend during their own lifetime. It can provide a larger after-tax estate for their beneficiaries than other corporately held assets, since the proceeds can come out of the corporation tax-free, unlike the withdrawal of other corporate assets by the beneficiaries. Just be careful about overcommitting to too large a policy.

Disability insurance

A disability can hurt a family’s financial well-being and progress. Like life insurance, it is important to have if you have beneficiaries. But even if you don’t have family members depending on your income, you should have disability insurance for as long as you are still working out of necessity rather than by choice.

What does disability insurance cover?

Disability insurance provides a monthly payment to you if you cannot work due to an illness or injury. Some policies last for a certain period like 24 months after disability, while others last until a certain age, like 65.

Some policies will pay your monthly benefit if you cannot work your current job (called “own occupation”), while others (called “any occupation”) may not pay out if you can work another job in another field.

The risk of disability for most working Canadians is higher than the risk of dying. That’s why the monthly premiums tend to be more expensive than those for a life insurance policy. This is often a deterrent from purchasing disability insurance.

Most insurance agents focus primarily on life insurance over disability insurance. As a result, life insurance tends to be sold more often than disability insurance. But a savvy business owner looking to reduce their financial risks should be buying disability insurance to protect themselves and, if applicable, their family.

Business overhead insurance

If your business has fixed business expenses for an office lease or a mortgage, non-owner staff salaries, or equipment costs, you might consider business overhead coverage.

This coverage supplements the disability insurance that replaces your income by also providing a monthly benefit to cover business costs that might not stop just because you are not working.

Business overhead coverage tends to be for a shorter period, like 12 to 24 months, to keep the company afloat during a temporary pause in your ability to work and drive business income.

Critical illness insurance

Critical illness insurance pays out a lump sum payment if you are diagnosed with one of the listed conditions for your policy. There are generally no rules on how the payment is used.

You can use the funds to replace the income lost due to your illness. Some people may not see a change in their income, though, and if they do, critical illness insurance may be duplicating coverage already provided by good disability insurance coverage.

You can use the funds to pay for medical treatment. Some treatments may not cost anything, depending on their nature, but others could be expensive, particularly if those treatments take place in another country, for example.

If you have a spouse, your critical illness insurance policy could make it possible for them to take time off work to care for and assist you. The shock of a critical illness could make it difficult for them to go to work, and having funds to provide for an unpaid leave of absence could help.

For a business owner, having cash available to keep the business running, whether that means hiring additional help or otherwise, could provide a financial lifeline and peace of mind.

Health insurance

Health insurance is a nice employee benefit. It provides reimbursement of dental and medical expenses up to pre-defined annual limits.

If you do not have employees, it may not be necessary or even advantageous to obtain coverage. The premiums will be tax-deductible, and the reimbursements may provide some peace of mind, but chances are you will pay more in premiums on average than you receive back from the insurer. The insurance company needs to earn a profit, after all.

Another consideration is that a broken filling is not a big financial risk to insure against. It is not like a death or disability, which could be catastrophic financially. As a result, health insurance is not as critical. 

What is a health spending account?

An unincorporated business with staff or an incorporated business owner with or without staff can open a health spending account (HSA). This is a private health services plan that allows tax-deductible contributions and reimbursement of Canada Revenue Agency (CRA) eligible medical expenses.

There are fees to have an HSA, and it may not be worthwhile for an owner-manager with no staff unless they are in a high tax bracket and have consistent medical expenses adding up to thousands of dollars per year. For business owners with staff, an HSA can be a good alternative to traditional health insurance.

Liability insurance

If your business is risky and can be subject to a lawsuit, you should have liability insurance. The type of coverage may vary by industry, and some people are required to have coverage as part of their profession (for example, doctors, lawyers, and accountants).

Incorporation may protect you from personal liability in some cases, but if you want to protect your business and any assets within it from a lawsuit, it’s important to obtain liability insurance.

Consider what could happen if you don’t have insurance

All these types of insurance coverage are worth considering for a business owner. For the record, I have all of them myself, other than health insurance (I have a health spending account for myself and my employees). I have a spouse and kids, and I am mid-career, still working and saving for retirement.

Saving money is an important path to financial independence. But insuring against predictable risks can help reduce the risk of something derailing your goals.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

Read more from Ask a Planner:

• “We’re well off in retirement. How can we pay less tax?”
• How to withdraw RESP funds
• Can you move income back and forth between spouses?
• Should you sell stocks to simplify with an all-in-one ETF?

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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