Insurance for the self-employed: What kind of coverage do entrepreneurs need?

If you’re self-employed, you’re no stranger to hard work. You know that it takes a lot to be your own boss, whether that means the side hustle sales job in the evenings or you’re committed to the full-time grind of business ownership. You know that it takes a lot of resilience and fortitude to keep your business going. And all that hard work? It’s worth protecting! 

In a past life, large corporations or the big boss man may have lured you into a full-time position with the promise of group benefits. But when you’re self-employed? It’s all up to you. You call the shots, even with your insurance. 

Incorporating insurance into your financial protection plan can give you peace of mind so you can get back to business. Check out these insurance policies that both protect yourself and all the things you’ve worked for.

Self-employed vs. small business owner

In the age of online Etsy shops, entrepreneurial influencers, and multi-level marketing jobs, it might get confusing to determine your self-employment status. According to the CRA “If the worker is a self-employed individual, they must operate a business and be engaged in a business relationship with the payer.” This means, if you buy the stock or provide a service, operate the business, and sell your product to the customer, you are self-employed. 

Technically if you own the company and have employees, you are your own boss. However, that will fall under a different classification of employment—not self-employment. Business-owners may not participate in the day-to-day production of their business and may be responsible for the safety of others. Self-employed individuals work alone and only have to worry about themselves. 

This article will go over insurance options for those that are self-employed. If you’re looking for information about how business owners can use life and other insurance products to benefit their business, check out some of our other articles in our Insurance For Business Owners series.

If you’re self-employed, you have the flexibility to choose your own hours, who you work for, and for how much. The freedom is empowering, but it may also mean you don’t have: 

• Holiday pay
• Sick pay
• Statutory maternity/paternity
• Guaranteed minimum wage
• Paid time off for emergencies
• Paid compassionate leave

The flexibility of self-employment is nice, but it may leave your finances vulnerable in the event of an emergency. Insurance is there to provide you peace of mind, so you can focus on your business and rest assured knowing you’re taken care of financially, no matter what!  

Insurance checklist for the self-employed

Your insurance needs will depend on your individual and business circumstances. To cover your bases and protect your family financially, you may consider the following insurance products: 

• Health insurance
• Dental Insurance
• Short-term disability insurance
• Long-term disability insurance
• Life insurance
• Critical Illness Insurance
• Property and liability insurance

Health and dental insurance for the self-employed

If you are self-employed, you are responsible for selecting and paying for your own health and dental costs not covered by universal health care. This can seem overwhelming at first, but the freedom and flexibility of choosing a plan that works best for you can save time and money for you and your business.

As a self-employed individual, you may have frequent employment and contract changes—but when you purchase your own individual health and dental insurance, your coverage remains the same. Depending on your health needs, you can add optional coverage that may not be available under a strict group plan, such as paramedical expenses (physical therapy, etc.).

Health insurance plans are generally structured like this:

The coverage tier you use will depend on your specific situation. If you’re self-employed and support a family full of dependents with medical expenses, you may consider an enhanced plan or one with more comprehensive coverage. If you don’t have kids but have a spouse with work benefits, you may just need the basic health plan to top you up to 100%. If you own a business and are looking for information on group plans, that’s a completely different story. For your unique situation, it’s best to check in with one of our expert insurance advisors.

Can you get income protection if you are self-employed?

Short-term disability insurance is usually offered to cover the loss of income from short-term or temporary health issues arising from a less serious illness or accident. The benefit payments can begin as soon as you use up your sick leave, sometimes as early as 1-14 days after a claim is submitted (see the section below about waiting periods), with coverage lasting typically between 6-26 weeks – although coverage can also go as long as 52 weeks. It’s commonly used for temporary health issues, like minor accidents, sports injuries, and back problems that may prevent you from working for a few weeks or months. 

Long-term disability insurance is used to protect against loss of income from more persistent, ongoing health issues. Its coverage usually begins right after the short-term disability period is over and the coverage time can be for 2, 5, or 10 years, although many coverages last until the age of 65 (standard retirement age). It’s usually purchased by individuals to supplement or replace their employer-provided disability insurance or in some cases to establish their own customized disability plans. It’s commonly used for mental health problems, musculoskeletal problems, accidents, and more.

The period of time between the start of your disability and the start of the benefit payment period is known as the “waiting period” or “elimination period.” During the waiting period, you are paying for your needs out-of-pocket. Most long-term disability policies will allow waiting periods of 30, 60, 90, 120, 180, and 365 days, although 90 or 120 days is the most commonly selected period. The longer your waiting period the lower you will pay in premium. Why? Most disabilities are resolved within the first few months (such as broken bones, back issues, short-term illnesses); the longer the waiting period, the less likely an insurer will have to start paying out on a claim.

Will Canada Pension Plan (CPP) or EI cover me if I’m self-employed?

If you are contributing to Employment Insurance and CPP/QPP, you are indeed eligible for EI Sickness Benefits and CPP Disability Benefits respectively. However, the criteria for claiming disability benefits under these plans is very stringent, and payout through these programs may be much lower than your current monthly wages.

EI Sickness Benefits provide for Canadians unable to work because of sickness, injury, or other issues. Those that are self-employed have to register for this program. Additionally, you have to wait 12 months after registering for this program before applying for benefits. In order to qualify, your injury or illness must have barred you from at least 40% of your time devoted to your business. There’s also a minimum income requirement for the previous tax year—if you made less than $7,555 being self-employed, you will not qualify. So, if your business is super small, you might not benefit from this. Additionally, as per the government of Canada website, the premiums for this coverage are based on how much you earn. It states, that in 2021, for every $100 year, you pay $1.58 for this coverage. The amount of your benefits may decrease if you continue to work or if your business generates earnings while you are collecting EI special benefits. The EI sickness benefit amount is however always taxable. So yes – you are potentially covered by this public safety net – but it’s a pretty small net.

CPP Disability Benefits provide for those who have made contributions to CPP and are disabled and cannot work at any job on a regular basis. If your net self-employment income and pensionable employment income is more than $3,500, you will have to contribute to the CPP. The disability must be both severe and prolonged to be considered eligible. Severe disabilities are those that stop you from doing any type of substantial, gainful work at all. Prolonged disabilities are long-term where the duration is either unknown or likely to result in death. The average payout for CPP Disability benefits in Canada is just under $1,000 per month; the maximum monthly payment as of 2019 is just over $1,300. CPP benefits are also taxed, just like income. Most individuals would find the $16,000 in pre-tax benefits less than adequate to pay their bills and maintain their lifestyles. And remember, CPP benefits only pay out if you are completely unable to obtain gainful employment whatsoever.

Should I get my own disability insurance if I’m self-employed?

Private disability insurance plans exist to cover the gap for those who need protection beyond the critical but small social safety net that covers the basic needs of Canadians. Additionally, private disability insurance companies may offer more competitive rates with less restrictive coverage. 

For both short-term and long-term disability policies, there may be stipulations and conditions that will prevent you from coverage. We’ve broken down how disability insurance coverage works in Canada if you’d like to read about how these policies can provide coverage in your time of need. If you have further questions about disability insurance, wonder how much disability insurance costs, or you’re ready to set up a policy to secure your financial future, speak to one of our advisors today!

What kind of life insurance is best for the self-employed?

There are many varieties of short and long-term life insurance products available to you depending on your needs. Term life insurance covers you for a specified term (10, 20, or 30 years) where permanent coverage will run for your entire life. Some permanent products may have an investment or savings component that can further assist your business via cash value policy loans and more.  

We work with the most reputable life insurance providers in the business and can find a solution that fits your needs. If your looking for a shorter-term option to cover debts, check out our reviews of Canada’s best term life providers. If you’re ready for long-term coverage, we’ve reviewed best whole live providers as well. 

Critical illness insurance for the self-employed

When you are self-employed, you have full control over how much money you make. Sometimes this means working on an extended contract, or completely freelance. If you become ill and are unable to work, your income may be replaced with disability insurance. However, in the unfortunate circumstance that you are diagnosed with a life-threatening illness such as heart attack or stroke, you may also be faced with additional out-of-pocket expenses that universal or disability insurance will not cover. This is where critical illness insurance comes it. It is a tax-free lump sum payment provided to you by the insurance company when you are diagnosed with a life-threatening condition. This is not meant to replace the cost of health care insurance, but rather be used as financial assistance for additional costs associated with being diagnosed with critical conditions. This can be used for any kind of expenses you wish, including business expenses, unexpected expenses for medical recovery (retrofitting homes, out-of-province treatments, specialized drug cost, etc.), and more.

If I am self-employed, are my insurance premiums tax-deductible?

Life insurance – The lump-sum death benefit is always tax-free for your beneficiary, but you may also be able to pay fewer taxes on life insurance premiums if you place the coverage under the business name. If the policy is bought by and paid for by the business, then they are subject to business, not personal taxes, which may be less. 

Disability insurance –  If it is certified by a doctor that you have a severe and prolonged impairment, you can fill out a form detailing the effects of impairment. If approved, you may be eligible for a disability tax credit, which reduces the amount of income tax you have to pay. 

Health Insurance Plans – Those that are self-employed are eligible to deduct premiums paid for health and dental insurance from their self-employment income. You are also able to claim these premiums for your spouse or dependents. Additionally, If you are a business owner that has employees and you happen to be providing them with a health plan, then you can claim the premiums – as long as they are considered to be a reasonable business expense. However, you may not qualify under the “self-employed” tax category if you have employees. 

Of course, check with your tax advisor to discuss your unique situation.

Other insurance for the self-employed

In addition to insuring yourself as a person who is self-employed, you may also want or need to insure the business itself. You can purchase insurance for items such as your stock, products, buildings, vehicles equipment, among other things. The kind of insurance you need will truly depend on your business, what you sell, and your size. 

For example, someone who has an Etsy shop and sells custom baby clothing may consider purchasing a home-based business endorsement to add onto their personal home insurance that covers the baby clothing (stock) and additional liability coverage. Whereas, a self-employed accountant may want to purchase errors and omissions insurance in case they make a costly mistake on a file. 

Deciding what insurance products to use in your business protection plan will all come down to you and your individual needs. As someone who’s self-employed, you may not fit into the cookie-cutter boxes of a standard policy, but we’re here to help. Speak to one of our advisors today to determine the right insurance for you and your small business!