Posted in MicroBusiness Musings, General Freelance Info at 7:21 pm by andy

As a freelancer, we get to decide what our benefits package will look like. Often, though, we’d rather not think in those terms and instead just focus on whether we’re raking in the cash.

Bad things happen, though.  Many corporations provide you with ways to protect your income and your family’s finances in case something bad happens to you while you’re employed.  But being the business owner means you have to take ownership of this side of your finances.

What happens if you get hit by a car and end up in the hospital for a month and then need another 6 months of physical therapy before you can sit at a keyboard and work again?  How about you contract a tropical disease on one of your frequent vacations to the islands and can’t work for a year while you recover your strength?  That would be pretty devastating to your finances, huh?

Consider getting disability insurance.  Disability insurance pays you if you’re out of work for any length of time, providing income replacement for the money you might otherwise have made.  Yes, there’s a cost, usually $50 - $100 per month, depending on your age, the time between when you become disabled and when you start collecting, the length of time that you can collect (some policies are limited to 3 or 5 years, but you can also get a policy that will pay for the rest of your life), and the amount per month that the policy will pay you.

What should you look for in a policy?  The first thing is that it’s backed by a company that you think will be around for the next 20 to 30 years.  You don’t want to get stuck in a situation where you are spending on a policy for a while and then the insurance company goes bankrupt and you have to pay more to get another policy in place.

You should also look for a policy that will pay you for at least 5 years of disability.  In general, disabilities that might last longer than 5 years will likely kill you before the end of that timeframe or you’ll have figured out an alternative way to either generate income or support yourself.

Finally, you want to get a policy that will provide full income replacement now and 5 years from now when you’re making more money.  Many policies will provide a rider that will let you increase the payout amount on the policy’s anniversary — at an additional cost, of course.

Twenty years ago, when I first started freelancing, getting a disability policy in place was one of the first recommendations from my accountant.  Although I’ve never had to collect on the policy, I feel better knowing it’s there for me if I need it.

She also recommended that I NOT take the insurance as a tax deduction.  In the USA, if you take the policy’s costs as a deduction, any payout on the policy is taxable.  By eating the costs as an off-tax-form expense, I receive the total amount of the payout and not 60% of it (after taxes).  Your situation may be different, so check with your accountant for how you want to handle that.