Unlike employees, those who are self-employed do not have sick leave, accident insurance, nor income replacement benefits when they are unable to work.
The only way for independent contractors to protect themselves is income insurance. So what are the features of this type of coverage?
A Non-Taxable Monthly Income
When someone who is self-employed cannot work due to an illness or accident, they would receive a monthly, tax-free income- provided that they have opted for some type of income insurance. Insurers generally calculate the benefit amount based on typical earnings less business expenses, but without taxes. Policies might also pay out a portion of the monthly benefit if the independent contractor continues to work part-time. Some insurers also offer to index benefits in case of disability.
Several options are possible for the waiting period: the insured can choose to receive the first payment on the first day or after 15, 30, 60, 90, or 120 days, or even two years with certain policies. The longer the waiting period, the lower the premium, but this requires the insured to have savings to cover everyday expenses during the waiting period. Self-employed workers also have the choice between several payment periods: they could opt for payments spread over two years, five years, or even until the age of 65.
What Does Income Insurance Cover?
When an independent contractor becomes unable to work or perform their job as a result of an illness or accident, income insurance can cover daily expenses such as:
- Mortgage or rent;
- Car loan, insurance and registration fees;
- Phone, cable and internet bills;
- Personal loans, credit cards and lines of credit;
Two Types of Coverage
There are two types of income insurance contracts:
- Guaranteed renewal: allowing the insurer to adjust premiums, if necessary, in the event of the changes in the insurance portfolio;
- Irrevocable coverage: more costly, this type of policy has the advantage of fixed conditions as soon as the policy is in effect. Therefore, the insured benefits from the same premiums and guarantees.
When we come to realize that on average one in two persons become disabled for more than three months during their working career, therefore it is easy to understand the importance of buying income insurance if you are self-employed. You can also take out debt insurance to cover a mortgage, car loans and lines of credit in the case of disablement.