Self-employed create own benefits
Tuesday, February 23, 1999
Special to The Globe and Mail
Employees working for large corporations often receive generous benefit packages. These typically include life and disability insurance, along with health and dental coverage, to protect them and their families. But for an increasing number of Canadians who work outside the corporate domain, such benefits don't always come with the job.
Last year, Statistics Canada reported that just under 2.5 million Canadians, a record 18 per cent of the labour force, are self-employed. Many of these people work on their own or in small companies that can't afford to establish a group plan, so they must design their benefits to rival the coverage they could receive in a corporate environment.
"As we move to an entrepreneurial base, more and more people are realizing they are fully accountable for building their own benefits program," says Mark Foris, regional director in Northern Ontario for Great-West Life Assurance Co.
The experts point out that when putting together a benefits package, a self-employed person faces many options. "A first impression might be that a sole proprietor doesn't have the same access to group benefits that an employee does. But the reality is that a sole proprietor has more of a benefit because they can design a program exactly the way they want it," Mr. Foris says.
For instance, individuals may have the opportunity to take out additional life insurance to provide for their family than would be available in the group plan. But there are also some potential disadvantages. An entrepreneur must be able to demonstrate reasonable health within his or her age group before becoming eligible to receive life insurance. Employees in a group plan usually don't have to worry about that because, by definition, their plan contains a mixture of people of various ages and in various stages of health.
Another limiting factor is that an entrepreneur not only must carefully select the type and amount of benefits needed, but also those that are affordable. Often, that becomes more of a cash-flow matter, rather than an issue of whether certain terms can be deducted by the individual as a business expense, says Gil Korn, a tax manager in the Vancouver office of Ernst & Young.
One critical area of protection that self-employed people sometimes have a tendency to overlook is long-term disability. This insurance can be especially crucial to entrepreneurs, many of whom would have no other means of support if they became unable to work. Moreover, a private disability-insurance policy often can be designed much more comprehensively than a group disability plan, analysts say.
However, to cover themselves adequately for disability, entrepreneurs may have to jump through a few extra hoops. Just getting disability insurance could be a problem for a self-employed person starting out who doesn't have a steady track record of earnings. People in that situation must be able to provide at least a realistic estimate of their expected contract income, therefore actual contracts or documented proof of past earnings, such as T4 slips, should be retained.
Detailed financial statements for the business are also a necessity because the insurer will cover only an entrepreneur's net income, not gross revenue.
A key new area of insurance that has become increasingly popular with many self-employed individuals is critical-illness coverage. Unlike disability insurance, this coverage provides a lump-sum payment to cover any large capital requirements if the individual experiences certain debilitating illnesses, such as heart disease, stroke or cancer.
A tax change introduced in last year's federal budget allows self-employed persons to deduct health and dental premiums paid to a private health-services plan (PHSP) provided they are active in the enterprise and derive at least 50 per cent of their overall income from it. Entrepreneurs and their spouses can deduct up to $1,500 each, as well as an additional $750 for each dependent child.
Another option for self-employed individuals belonging to certain trade unions or community or professional associations is to band together. Some offer entrepreneurs the opportunity to pool their resources, thereby deriving an economy of scale through which they can contribute coverage to a PHSP.