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They're
added expenses, but owners of home businesses should
consider health and life insurance. And if the owner
dies, 'key person' coverage can keep the business
going.
Saddled with bills for
computer equipment, supplies and business insurance,
owners of home-based businesses might not want to even
think about the added expense of health, life and
disability insurance. But it's unavoidable.
"I know they can be expensive, but if you are the sole
breadwinner of your home, you need to consider those
things," says Madelyn Flannagan, vice president of
education and research for the Independent Insurance
Agents & Brokers of America (IIAA), a trade group
based in Alexandria, Va. "They're pouring all their
profits back into the business and not thinking about
the business if something should happen."
As with business liability insurance, the kind of
insurance you want depends on how much risk you are
willing to take on, as well as your personal and
business financial goals. A certified financial
planner skilled in insurance issues or an insurance
agent certified as a chartered life underwriter (CLU)
can help assess your needs, particularly if your
business is incorporated and your insurance purchases
have tax ramifications.
There are several basic types of insurance you'll want
to consider buying: health, life, "key person" and
disability.
Weighing your health
insurance options
If you're an employer of one person -- that is, you
employ yourself -- you basically have two health
insurance options, says Dave Fusco, director of
individual and small business sales for Anthem Blue
Cross and Blue Shield of Connecticut. You can buy
group health insurance, if you qualify, or individual
health insurance.
More health insurance companies today offer group
health plans for groups of one, Fusco says, but that
will vary by state. To qualify for an Anthem group
plan, for example, you'll have to show state and
federal tax forms to prove that you are indeed a
legitimate business, work at least 30 hours a week at
your home-based business and have been in business for
three consecutive months. Requirements will vary by
company.
You'll have to evaluate whether a group or individual
health plan suits your needs best. Individual plans
are subject to medical underwriting, Fusco notes,
which means your health will be a factor in whether
you are accepted into that plan. In contrast, a group
plan can't turn you away because you have health
problems. In addition, group plans typically must meet
stricter state and federal guidelines about the
coverages they offer.
Buy from the source
While many consumers believe they have to work through
an agent or trade association, like a chamber of
commerce, you can go directly to a company to shop
rates and buy a health plan. Fusco says large
insurance companies typically will not have higher
rates for people who go through brokers, but notes
that plans purchased through chambers or other
organizations and associations can tack on an
additional monthly administrative fee, making them
slightly more expensive.
What to look for
Your cash flow should be a consideration when
determining how much of a deductible you want, says
Mark Johnson of Johnson Insurance Consultants in
Duluth, Minn. Someone who has a lot of cash in reserve
may be able to afford a larger deductible, and
increasing a deductible from $100 to $2,000 can cut
premium payments in half over the course of a year.
"If someone is reasonably healthy they might not have
$2,000 in medical charges per year anyway," says
Johnson, immediate past president of the National
Association of Life Underwriters (NALU) who now sits
on its board of directors. "It really depends on what
their cash position is. A younger individual might be
looking for HMO-type coverage with little or no
deductible because they have little or no cash
reserves. An older individual . . . usually has a
little bit in reserves and therefore can buy a higher
deductible."
In some cases, you can save a bundle of money by
opting for a health plan that does not cover your
doctor visits, hospital services, medical tests and
other medical costs -- something known as catastrophic
coverage.
"It's a very subjective assessment and varies from
individual to individual," says Richard Coorsh, a
spokesman for the Health Insurance Association of
America, an industry trade group in Washington. "Some
people are happy with only catastrophic health
coverage in case they get hit by a bus. Others want
more comprehensive coverage if they use health care
services."
Life insurance might require
multiple policies
The life insurance needs of a home-based business
owner are not substantially different than those of
someone working in regular employment, and they are no
less important.
"Life insurance, especially if you have a partner in
the business or if your home business is what keeps
the family going, is crucial," Flannagan says. "You
need to look at the types of benefits typically given
to a group employer."
As with health insurance, cash flow is a consideration
in buying life insurance, Johnson says. "If you have a
brand-spanking-new business and are worried about cash
flow, buy as much term insurance as you can afford
instead of putting that money into permanent
insurance," he advises.
Home-business owners have four basic concerns when it
comes to life insurance, Johnson says: They are
carrying some business debt; they have a family; they
might have employees; and they might have a business
partner.
"Because you have a combination of needs, you usually
can't satisfy all those needs with one policy," he
says. "You might have policies with different owners
and different beneficiaries."
'Key person' insurance
Something called "key man" or "key person" insurance
-- a form of life insurance -- might be suitable for
some home-based businesses. The insurance pays out
when the owner of the business or a crucial employee
dies or becomes disabled, infusing the business with
cash so that it can continue to operate during the
transition. If you don't care whether your business
continues after your death, you don't need key person
insurance. If you have a partner who depends on the
business for income, however, you probably do need it.
Banks and government loan programs sometimes require
the insurance.
"An awfully large percentage of home businesses don't
survive after the death of the owner," Johnson says.
"This is more for businesses that have at least a few
employees and enough structure so that it is likely to
survive the death of the owner. I don't see it as a
big buy for home businesses."
Disability insurance: a
safeguard against illness
Disability insurance makes payments to you if a
physical or mental illness, disease or bodily injury
prevents you from working. People of working age are
more likely to become disabled than they are to die,
making disability insurance at least as important as
life insurance.
"I might recommend this before term insurance,"
Johnson says. "Far too often, the individual buys life
insurance and forgets about disability insurance."
In general, the disability insurance needs of a
home-based business owner will be no different than those of a
regular employee. However, the home-business owner should
consider getting a shorter waiting period for benefits to begin,
Johnson says. Waiting periods are usually anywhere from 30 days
to 180 days after the onset of the disability or illness, but
those can be negotiated down. Bear in mind, though, that shorter
waiting periods will mean higher premiums.
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