Personal Insurance
In addition to the insurance for your business activities, you should revisit your personal insurance needs in light of starting a home-based business. How will you handle health insurance, for example, if you're no longer employed elsewhere? What happens if you become disabled? Your previous employer may have offered a life insurance policy as a benefit — should you consider taking out life insurance now that you're on your own?
Health
As health costs continue to climb, health insurance has become an issue for everyone — individuals, small businesses, large corporations, and, of course, home-based businesses. In fact, many people consider the cost of health insurance to be a significant barrier to starting their own business.
While Canadians will likely be able to find reasonably priced private health care plans to supplement their government health coverage (usually offering a buffet of benefits, including varying dental plans, prescription reimbursement and health care practitioner coverage), Americans may find that individual health insurance comes with a hefty sticker shock.
In this case, first investigate whether you qualify for the “COBRA” coverage your employer may be required to offer when you leave. This could provide the current level of coverage from your employer plan, at your current cost, for up to eighteen months. Also check whether it would be practical and cost effective to add yourself to a spouse's policy if he's continuing to work outside the home.
Don't put off obtaining health insurance to when you think you can better afford it. The later you leave it, the more likely you'll end up with a medical condition such as heart disease or cancer either in yourself or in a family member, which can limit your ability to qualify for health insurance.
Of course, you can also buy health insurance as an individual from a carrier in your area, but it would be wise to also check the rates offered by trade associations that you belong to (or could join) or organizations that cater to home-based businesses or the self-employed, such as the National Association of the Self-Employed.
Also keep in mind that it might be more economical to sign up your business for a group policy. Even if your business has no employees and covers only you as a sole proprietor, you can still qualify for a group plan.
One other avenue is to buy health care coverage that's limited to “catastrophic” situations. Instead of buying insurance that includes coverage for your routine costs, you'd pay for regular checkups and medicines out of your own pocket. Your health insurance would only kick in at a certain expense level or deductible, such as $5,000, or in the case of hospitalization. It may be a more affordable way to ensure that you won't be financially ruined by a significant injury or health condition.
Disability
What would happen to you and your family if you were disabled to the extent that you could no longer earn a living? You not only won't be earning an income, but your care could turn into a financial burden as well. Disability insurance is designed to replace at least part of your income, allowing you and your family to survive financially in case of a disabling accident or illness.
Disability insurance for home-based businesspeople or the self-employed has been one of the toughest coverages to qualify for and to afford, but it is available. Buy as much insurance as you can afford (and that the insurer is willing to give you — they often want to see financial statements from the business to prove how much you're currently making).
Some insurers limit their long-term disability payouts to five years, on the grounds that many people are disabled temporarily, rather than permanently. But you need to look for longer coverage (usually up to age 65) — after all, if you're permanently disabled, it's not going to help you if your benefits end at year five.
To make disability insurance more affordable, lengthen the amount of time before your benefits kick in (moving the date from thirty to ninety days can provide a significant reduction). But beware of going with an “any occupation” plan: This means that if you're disabled and can no longer do your own job, the insurer can refuse to pay as long as you're able to work at any other occupation. “Own” occupation covers you specifically for your occupation (e.g., writer, golf pro), but is more expensive. “Regular” occupation can be a middle ground between the two, covering you as long as you're unable to work at any occupation that's close to your current occupation and that you'd reasonably be qualified or could retrain for.
Critical Illness/Long-Term Care
Critical illness insurance and long-term care coverage are two increasingly popular coverages to consider. Critical illness insurance pays you a specified amount of money if you're diagnosed with a covered illness such as cancer and often helps you find qualified treatment facilities. Long-term care coverage covers the length of time that you could reasonably expect to be in a long-term care facility or nursing home — often about three years.
Life
If you pass away, are you leaving your family with financial problems as well as grief? Life insurance is meant to provide income to those you leave behind, as well as to pay estate taxes and funeral expenses. If you're single, without financial obligations, you may not need life insurance. But if you have a family or debt, you need to think about it.
For the home-based businessperson, especially those in a partnership, life insurance plays another role. If, for example, you are partners with a nonfamily member, his spouse might inherit the partnership share of the business if he dies. If she doesn't want the business, you'll need to buy her out — but you might not have the money to do that. To avoid this situation, partners may agree to take out life insurance policies, naming each other beneficiaries, with the proceeds to be used specifically for the buyout of the business. You might also want to consider life insurance for any key individual whose death might jeopardize the business.
When it comes to types of insurance, term (which provides a specific amount of money) is the cheapest. Other types, from whole life to universal, generally include an element of savings. The one you choose depends on what you can afford and your family situation.
To calculate how much insurance you should buy, consider how much would be required to buy out your share of the business (in the case of partnership life insurance), or how much your family would need to live on (in the case of personal insurance). Include future costs such as college educations for your children.
