It’s tough enough starting a business without having to be your own benefits counselor. You don’t have to do it alone. Before you start a company, it’s best to meet with a financial and tax adviser to set up your own benefits plan and a retirement strategy you won’t be tempted to abandon if times get tough. If there is any consolation about buying your own benefits, it’s probably that the benefits you left behind at your previous employer were costing you more each year. Even though your coverage will likely be 100 percent deductible come tax time, the sticker shock of insuring yourself is a constant in business.
Shopping for benefits is before you leave your current employer. Why? You can get a great deal of detail on your current coverage, match it to current needs, and set a baseline for what you’ll need to buy.
An Overall Insurance Checkup Before You Start Your Business
Take a holistic approach to your benefits picture-you’re not just insuring your business-related needs. You need to take a new approach to insuring your life. In the 21st century, Americans have learned that the world is a riskier place and self-employed individuals need to make sure they have the right health, property, disability and life insurance.
Water damage and earthquake insurance options. If you live in a flood plain or an earthquake zone, chances are you probably already know you do, since that disclosure may be a legal requirement. But review the need for this coverage with your agent. Particularly after Hurricane Katrina and the damage it did in the Gulf states, many insurers started cutting back on the benefits for particular risks.
Disability coverage. Disability insurance takes care of lost income if you are sick or injured. This is non negotiable – if you’re self-employed, you need it. And as we’ve mentioned, you need to buy that coverage while you are still employed at your current salary to maximize the amount of coverage you can buy. You’ll almost certainly qualify for less coverage in the first years of your business unless your documented salary is much higher once you’re working for yourself.
Auto insurance. If you are using your personal vehicle to serve your business, it is worth going back to your agent to discuss whether your coverage is adequate. A truck that got you to your old job needs a particular type of insurance; a truck that now carries merchandise or tools may need a review for theft, liability coverage, and other issues to protect both you and your business. Also, while it’s not precisely an insurance issue, start keeping good mileage and expense records for that vehicle to properly track its operation for tax purposes.
Property coverage for the business. Home-based businesses that require little more than a computer to run may be adequately insured on the business owner’s homeowner’s policy. Check the policy limits with your agent; many policies do not cover software and may exclude computers used for business purposes. But if you are running a legal business on your property that involves construction, manufacturing, or some other mechanical support, you definitely need to call your agent to make sure you’re properly insured for that. Obviously, if you are working at an off site business address, you need to check with a professional to make sure you have the right coverage as well.
Life coverage. Talk to a number of agents about life insurance coverage that will protect your spouse and children with enough money to help them continue their lifestyle and their educational goals. That includes money for ongoing expenses, mortgage payments, and tuition. Your spouse should also consider similar coverage, particularly if he or she is working. Even if he or she is not working, you may want to consider coverage. A recent poll estimates that replacing the services of a stay-at-home child-care provider can cost up to $137,000 annually. You might consider life insurance for the children, if only for burial coverage or to guide a sensible item so family members can access insurance, home, and estate information in a crisis.
Here are some ideas on bow to mitigate your insurance costs and what you’ll pay out of pocket as time goes on:
Many self-employed small-business owners with either a few employees and perhaps a partner, or no employees other than themselves, don’t have a company retirement plan. They complain that the choices are too confusing, the plans too costly to set up and maintain, and too expensive to include employees.
But small-business owners have better options than they may realize, say financial planners, and the reality is that many cannot afford not to set up a retirement plan. While many assume they’ll simply sell their business when it’s time to retire and live off the proceeds, it’s risky to project whether what they receive for the business will be sufficient. A well-funded retirement plan adds security.
Exactly which plan to choose depends on many factors, including whether you have employees and whether you want to help them with retirement, how long you have before your own retirement, what you currently have saved for retirement, and how much money you’ll need to pay for the retirement you envision.
Here are some retirement plan choices for small-business owners:
Simplified employee pension (SEP). SEPs are set up as individual retirement accounts for each employee but allow contributions far larger than standard IRAs, and are easy and inexpensive to establish and maintain.
The major drawback of SEPs for some owners is that they must fund contributions for eligible employees at the same rate they fund their own accounts, Moreover, employer contributions are immediately vested. Generally, owners must include employees if they are at least age 21, have worked three of the preceding five years for the owner, and have earned at least $450 for the year (employers can make eligibility less strict).
Eligible employees can elect to contribute up to 100 percent of compensation up to a maximum of $10,000 for the 2006 plan year through salary reduction. (The amount elected by the employee may be expressed as a percentage of compensation or as a specific dollar amount.)
Other plans. Business owners have additional options, such as profit-sharing and Keogh plans. Another consideration is defined-benefit plans, which would allow an owner who’s late to the game saving for retirement to quickly stash away large amounts of money. A defined benefit plan can be expensive to set up for small businesses and you’re actually committed to setting aside a certain amount regardless of profits. But less expensive versions, even for the self-employed, are surfacing.