Insurance for self-employed Canadians: What coverage do you need?

If you are self-employed, the onus for insurance coverage is squarely on you. If you are considering self-employment or are already self-employed, consider whether the following types of insurance apply to you. 

Life insurance

If you have a spouse and/or children who rely on your income, you should probably have life insurance. It could replace that income if you were to die, protecting your family from financial hardship. 

How much life insurance do you need? 

You need enough life insurance to cover your financial obligations—such as a mortgage and personal debt—and provide sufficient care for your dependents.

Although a family’s expenses could decrease if someone died, most households have lots of fixed expenses like rent, mortgage payments, property taxes, insurance, utilities, children’s expenses, and other costs that do not change if there is one less family member. In some cases, a family’s expenses could even increase to account for additional help like a nanny for little ones or other help around the house.

A business owner may also consider life insurance to provide cash for their business to keep operating. If the business’s value could be impaired by their death, a life insurance policy paid for and owned by the business could provide the funds to hire a replacement or shore up cash flow.

Some business partners agree to have life insurance on each other. This coverage can provide funds for the survivor(s) to buy the deceased partner’s share of the business from their family. 

When you buy life insurance, you can buy term life insurance that covers you for a certain number of years, or you can get permanent life insurance that is notionally meant to keep forever. Permanent insurance contains an investment component, whether it’s whole life or universal life insurance. Premiums tend to be higher for permanent coverage since the risk of death rises with age. But term insurance generally has a renewal feature, whereby you can renew at progressively higher premiums for subsequent terms.

Business owners with corporations are often pitched life insurance as a tax and investment strategy, especially whole life and universal life insurance. These policies generally have high monthly premiums and are meant to provide future retirement income or a larger estate value.

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Corporately owned life insurance definitely reduces tax because you are putting money into a life insurance policy instead of into corporate investments, which generally produce taxable income. But the trade-off may be higher fees than comparable investment options. As a result, you may not be further ahead.

It is also important for business owners to consider other tax-efficient saving options like registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs). If RRSP and TFSA accounts are not maxed out already with a reasonable expectation that maximum contributions can continue, a corporate life insurance policy for any reason beyond risk management—that is, for tax and investment reasons—should be considered with caution.

Corporately owned life insurance can be a great opportunity for someone who has more money in a corporation than they are ever going to spend during their own lifetime. It can provide a larger after-tax estate for their beneficiaries than other corporately held assets, since the proceeds can come out of the corporation tax-free, unlike the withdrawal of other corporate assets by the beneficiaries. Just be careful about overcommitting to too large a policy.

Disability insurance

A disability can hurt a family’s financial well-being and progress. Like life insurance, it is important to have if you have beneficiaries. But even if you don’t have family members depending on your income, you should have disability insurance for as long as you are still working out of necessity rather than by choice.

What does disability insurance cover?

Disability insurance provides a monthly payment to you if you cannot work due to an illness or injury. Some policies last for a certain period like 24 months after disability, while others last until a certain age, like 65.

Some policies will pay your monthly benefit if you cannot work your current job (called “own occupation”), while others (called “any occupation”) may not pay out if you can work another job in another field.

The risk of disability for most working Canadians is higher than the risk of dying. That’s why the monthly premiums tend to be more expensive than those for a life insurance policy. This is often a deterrent from purchasing disability insurance.

Most insurance agents focus primarily on life insurance over disability insurance. As a result, life insurance tends to be sold more often than disability insurance. But a savvy business owner looking to reduce their financial risks should be buying disability insurance to protect themselves and, if applicable, their family.