Insurance Questions

So what is it about insurance (particularly health insurance) that spooks so many people?

After the Four Key Questions (a previous blog post), this is probably number five. The question is usually posed as, “So how do YOU handle insurance?”

For many, this issue is a potential show-stopper from making the Jump to Consulting. It need not be, and the answer is simple. You buy it — it is simply a cost of doing business, just like a computer or a copier. Furthermore, since it is tax deductible, you buy it with pretax dollars just like the big guys do.

Sure, the cost may seem like a lot, particularly if you are currently in a company subsidized plan. But in reality, you are already paying for it as part of your benefits package. Although you don’t see it in your paycheck, your employer certainly sees it as part of your overall compensation. As the old saying goes, “their ain’t no free lunch…”

Although health insurance is usually the main concern, you likely need several other types of insurance, including disability, life, and liability. Here are some comments.

Health Insurance – Even if you are young and healthy, you need health insurance. This is particularly true if you have a family or other dependents. Without health insurance, one accident or a bout of cancer can mean financial ruin. No, I’m not in the insurance business. Just get the insurance — it is the responsible thing to do!

Thanks to the recent government health legislation, medical insurance should be easier to obtain for individuals and small businesses. (This is not a political statement — just my opinion.) I’ve know several people who might be consulting today, were it not for a past medical condition that made them or their family uninsurable. Hopefully, that has now changed.

I suggest a basic, no frills plan, with as high a deductible as you can stand. If you are mathematically inclined, you can figure out the level at which you are no longer paying someone else to handle your money. As a bonus, if you don’t meet the deductible, the money you might have spent on a premium is still in your pocket.

You should consider a major medical rider, although with the new legislation, this may no longer be needed. You should also consult your accountant about tax preferred medical savings plans to see if one makes sense for you.

Life Insurance – If you are young and/or have a family, you also need life insurance. On the other hand, if you are single, retired, and/or the kids are all raised, this may no longer be important. This insurance is not for you — this is for those who depend on your income.

I suggest term insurance, which generally gives you the most bang for the buck. Yes, insurance sales people will emphasize the accruing monetary benefits of whole life plans, but do you want insurance, or do you want a savings plan? Remember, insurance is there to mitigate risks.

Also remember the sales agent is working on commission, and makes more money on a whole life policy. The younger you are, the more affordable and reasonable the term insurance.

Disability Insurance – Like life insurance, you definitely need this if you have others depending on your income. But even if you are single with no dependents, you still may want to consider disability insurance. The real question is, “What are you going to live on if you become incapacitated?”

I suggest a long term disability plan, with a waiting period of six months or more. Like any high deductible, a longer waiting period reduces policy costs. As far as short term disability, I’ve only carried that when offered by an employer and have never purchased it directly for myself. Set up a rainy day savings account to self insure for the short term risks.

Liability Insurance – If you are dealing with corporate clients, you will likely be required to show proof of general liability insurance. This typically covers risks like slipping on the customer’s icy sidewalk, or driving your car into their lobby. Their goal is for you to have insurance in place to minimize the need for legal action if something bad happens during a consultation.

Depending on your business, you may also need additional specialized liability insurance. Two examples are a physician’s malpractice insurance, or an architect’s error and omissions insurance. These are often available from professional organizations. You should definitely discuss the liabilty issues with your attorney.

Other insurance – You may want to consider other insurance offerings, such as coverage for expensive equipment or business interruptions. Keep in mind that your homeowner’s policy probably does not cover business related issues. Check this out with your insurance agent.

Here are some final thought on insurance. Shop around, as prices will vary. If you belong to a professional organization, they often offer individual plans at group rates.

One way to simplify your insurance needs is to find a good insurance broker. You want someone who specializes in small business insurance, which may or may not rule out your personal home/auto agent. Check with your accountant or attorney for a recommendation, or ask other small business owners. A good insurance broker can be a very valuable ally.

Well, I hope this has helped put insurance in its proper perspective. As I learned from a wise old college professor many years ago, “The goal of insurance is to protect yourself against the big losses, not the small losses. You can cover the small losses, but the big losses can wipe you out.”

Good advice today, too.