Working for yourself may sound like an ideal career situation. You have the freedom to grow your own business the way you want, and without any of the parameters imposed by a boss. But it also means not having the safety net of benefits that are typically offered with a traditional job, such as health, disability, and life insurance, and a retirement plan.
While you can't put a price on being your own boss, not having good insurance coverage can end up costing more than you expected. Fortunately, there are ways to create a suite of benefits for yourself that can be cost-effective and which reflect your financial priorities.
Health insurance may be the easiest benefit for the self-employed to obtain, as the Affordable Care Act portal, Healthcare.gov, allows any American to submit an application for health insurance benefits. (Keep in mind that due to the Covid crisis, President Biden has re-started the open enrollment period, enabling Americans to again enroll from Feb. 15-May 15).
Likewise, you can obtain health insurance by applying directly with a health insurer, but the benefit of applying at Healthcare.gov is the ability to access any subsidies for which you my qualify. If you don't qualify for subsidies, and are not able to find affordable coverage directly from insurers, a third option is to seek health insurance with workers' unions or collectives, such as the Freelancers Union, which is free to join and where the power of group purchasing may help you access lower-cost coverage.
Finally, consider whether you can join a spouse or parent's health insurance plan, or if you don't have much income because you've recently started a business (or if existing business income has recently slowed), consider whether you qualify for Medicaid.
Life and disability insurance
Life and disability insurance can be obtained through organizations such as the Freelancers Union or directly with insurance companies. It should be taken into account that benefits purchased directly with insurers can in many cases be more expensive than those obtained from an employer, since employer-sponsored plans are generally discounted group insurance. However, if your family relies heavily on your income to maintain its lifestyle, the most responsible thing would be to have disability and/or life insurance coverage, according to human resources expert Gloria Salazar.
"Disability insurance is especially important for those with high incomes, as a disability could prevent them from making similar earnings on a permanent basis. Life insurance is more important for those who have families that depend on their income."
The cost of these forms of insurance varies according to your medical condition and age. Generally, it is easier to buy life insurance than disability insurance. If you're worried about cost, Salazar recommends focusing on term life insurance, which can often be more affordable.
"Focus on the near and medium-term. Get a term life insurance policy for ten or twenty years that gives you peace of mind for your family while you grow your business."
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Retirement savings plans
Working for yourself opens the opportunity to have a Self-Employed IRA and/or Self-Employed 401(k). Depending on your income level, freelancers or the self-employed may be able to contribute more to these plans than to a traditional 401(k). SEP plans allow you to contribute a maximum of $ 57,000 annually ($19,500 in self-contributions, plus up to 25% of your earnings, net of half your self-employment tax). SEP plans can be opened via most major banks or online trading platforms.
"Contributing to a SEP 401(k) is a great way to not only invest for your future, but also to reduce the amount of your income that is taxed," says Salazar.
Also, it's possible that a SEP 401(k) may have competitive fees and a wider variety of investment options than a traditional employer-sponsored plan. For this reason, Salazar also recommends considering rolling over old employer-sponsored plans.
Creating a suite of benefits for self-employed workers comes down to weighing financial priorities.
"There are some things nobody should do without, such as health insurance, or basic retirement savings," Salazar said. "If you have dependents, I'd also throw in life insurance. But how much insurance you buy, or when – whether you have an umbrella policy, or disability insurance – that very much depends on your own situation."
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