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| The Basics | Health insurance for home-business owners
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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.
By Insure.com
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.
"When you have a home business and it's your only source of revenue generation, you probably can't go very long without having income, so you need a shorter waiting period," Johnson says.
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