Minding your own business.
Insurance for Independents
(First of two articles)
Applied Instructional Design
The information in this article represents the author's opinion and personal recommendations as a business person who has coped with insurance issues. She is not an insurance agent, nor is she an expert on any aspect of the insurance industry. Consult a licensed insurance professional for answers to specific questions.
Imagine this: Thieves break in and steal your computer and copier from your home-based office. Will your homeowners insurance cover the loss?
You fall on the ice, breaking your wrist and both ankles. You are unable to work for two months and unable to drive to client sites for six months. Are you insured for the medical costs of this accident and for the loss of income while you can't work?
A client sues you, claiming that procedures in a manual you wrote made equipment run incorrectly, requiring costly repairs. Are you insured for the legal costs and for the damages, should you be found liable?
If you worked for a company, these types of insurance would probably be included in your fringe benefits package. Not so for independents. We must insure ourselves, just as we must arrange for all of our other "fringes." What types of insurance are in the "must have" category when you are in business for yourself? What types are "maybes"? (The categories are mine, not required by law!) Let's take the insurance maybes first.
Life Insurance. Life insurance is optional. You may not need it if you have no dependents or if you are wealthy enough to fund your own final expenses and cover any outstanding debts.
If you have dependents, however, you need to look at how you will cover all of these situations: education expenses, outstanding debts, income replacement, mortgage payments, and final expenses (funeral costs, medical bills, legal costs). Life insurance may be the best way.
Consider separating your insurance from your investments. You'll get higher returns on your money by investing outside of an insurance policy. Insure as necessary to protect yourself, your loved ones, and your business. Then invest to save for large purchases and to fund your own retirement, not your insurance agent's. Buy term life insurance because it is the least expensive, and invest elsewhere.
Business insurance. A business insurance policy covers business equipment, your office premises, and business property. It includes damage from fire, theft, and accidents, and the legal and medical expenses related to such damages. If you don't have any expensive business equipment and you don't have a business office, you probably don't need business insurance.
If you have a home office, you may need a business policy to cover it because your homeowners insurance may not apply.
A business policy might include errors and omissions coverage. Compare costs and amounts of coverage with a separate E&O policy before you decide.
Errors and Omissions Insurance. Errors and omissions insurance is also called "professional liability" insurance. It is very similar to malpractice insurance for doctors and dentists.
Who may need E&O insurance? Anyone who provides a tangible or intangible product and who might need protection from the rendering or failure to render of professional services. Accountants, architects, insurance agents, attorneys, engineers, real estate agents, computer programmers, and technical writers are among the professionals who should consider E&O insurance.
The information I have collected on E&O policies shows that this is very expensive insurance for the benefits provided. Premiums for up to $1 million (minimal coverage) range from $650 to $2,500 per year. I would like to hear from STC members on the subject of E&O insurance. Do you have it? From which company? Is the cost justified? Have you had to use it? What happened to your premiums then?
Umbrella Liability Insurance. An umbrella policy might also be a good idea for you. Umbrella insurance is strictly liability insurance. In an umbrella policy, the same company that insures your home and your automobiles provides liability coverage above and beyond the liability limits in the homeowners and auto policies.
Umbrella liability coverage probably does not include business liability, however, so you'll need to ask questions before making a decision. For example, if you have many uninsured investments (stocks, mutual funds), you might want to protect them under an umbrella policy. If you have a large mortgage on your house, you may want to protect it under an umbrella policy, but if your house is paid for, an umbrella policy may not be of much benefit. Ask your insurance agent to explain the situations in which an umbrella policy might be wise for you.
Insurance Must Haves
Homeowners or Insurance. Having your office in your home or apartment doesn't mean you can ignore homeowners or renters insurance. A business policy for a home-based office covers only the part of your home used for an office. You need to cover the rest of your residence and belongings for the cost of replacement, and you need to keep your coverage up to date. Add earthquake and flood insurance as appropriate. Shop around; homeowners rates vary considerably from company to company.
Automobile insurance. Do you use your car for business purposes? If so, you may need to change your automobile insurance when you go into business for yourself. Shop around for auto insurance, too, because rates and coverages vary widely. Your state may provide a guide to typical automobile insurance fees to help you compare companies.
Health insurance. You are the major asset of your business. You must keep yourself as healthy as possible, and you probably cannot afford to pay out of your own pocket for more than a few days in a hospital. For example, in 1989 the average daily hospital room rate in St. Louis, Missouri, was $637, according to a sales brochure from Mutual of Omaha Insurance Company. That's just for the room, not for any medical services. Imagine the cost in this year's dollars.
Health insurance, often called major medical insurance, is what we generally think of when we consider insurance coverage for illness, surgery, or accidents. Health insurance is available to independent consultants and their families in individual policies similar in coverage to group policies for full-time employees of major corporations. HMO and PPO policies are also available.
* HMO Plans. An HMO, or health maintenance organization, provides virtually all required medical care for a fixed amount. Premiums may be higher than for non-HMO plans, but there is no deductible. You may pay a small copayment, say $5.00 per visit, but you do not have to fill out claim forms. In return, you give up the choice of doctors and hospitals. HMO plans may not pay any benefits for services not included in the HMO.
* PPO Plans. A PPO, or preferred provider organization, is a network of doctors and hospitals under contract to an employer or an insurance company to provide medical services at a discount. PPO insurance plans pay the best when you use a PPO network member. Services outside the network are reimbursed at a lower rate.
* COBRA Insurance. If you are insured on a spouse's policy, you are probably wise to stay on it. If you have been laid off, you may be eligible for COBRA insurance coverage. COBRA is the Consolidated Omnibus Budget Reconciliation Act of 1986. COBRA provides qualified individuals and their families with health insurance for 18-36 months after employment terminates. Under COBRA, you are covered on your former company's insurance policy, only you pay the premiums at the group rate plus 2%. It is often less expensive to stay on the company's policy than to find one on your own. Also, pre-existing conditions are covered under COBRA if they are covered under the company policy.
* Long-term Care and Medicare Supplement Insurance. Long-term care insurance is fairly new, and I have not included it in this article. I'm not addressing Medicare supplement insurance either, since most independent consultants are under the age of 65 or not disabled, and thus not eligible. Don't ignore Medicare/Medicaid if you feel you can qualify, and don't ignore long-term care insurance if your situation calls for it.
Health insurance: Questions and Answers
The battle is on for healthcare reform. When a bill finally passes, the reforms will undoubtedly take effect over a period of several years. You will be on your own for quite some time when it comes to purchasing health insurance. Health insurance is hideously expensive and deserves your careful evaluation. You need to get what you pay for.
Here are 10 questions and answers you can use to protect yourself and to gather as much information as possible before you make a decision. I suggest letting several agents make "the pitch." You take notes, correct brochures and other written material, then ask any of the questions that haven't been answered to your satisfaction.
1. Can the company cancel my insurance? When can I make changes in my coverage? You want a policy that is guaranteed renewable and noncancellable, no matter what claims you make. Be sure you get this guarantee in writing. The only acceptable reasons for cancellation are nonpayment of premiums, or if the company stops selling policies in your state, or if you commit fraud on your application.
Often you can increase the amount of your deductible, thus lowering monthly premiums, with just a phone call. If you want to lower your deductible, you may have to reapply for the insurance. You will need to talk to your agent or to the company customer service representative any time you want to add previously excluded coverage.
2. What are the criteria for increasing premiums? Premiums usually increase on your birthdate and on the policy-renewal anniversary. Companies can also increase premiums for whole classes of policy holders in one geographic area at any time. My first company increased premiums this way 3 times in 18 months. When premiums had gone up by 70% even though I had received no benefits and paid for all my expenses out of my deductible, I started shopping again.
Do not buy a policy from a company that will increase premiums if you use the insurance.
3. When and where am I covered? The best policy is one that gives you worldwide coverage, 24 hours a day. If you never travel, find out how much you can save by selecting a policy that covers you only within U.S. borders.
4. What limitations does this policy require in my choice of a hospital or a doctor.? The type of policy determines the limitations. A "standard" major medical policy does not limit you to any specific doctors or hospitals, except in the case of services not included in the policy.
HMO policies require you to use the doctors that are on the staff of the HMO, and to use the HMO's hospitals and labs. PPO policies provide better benefits for using the doctors and hospitals in the preferred provider network.
5. Does the policy have a UCR (usual, customary, and reasonable) clause? If yes, what is the formula? Almost all companies are trying to control costs by paying only the "going rate" for various services in any geographic area. You might not get an answer to the formula question, and I'm convinced that nobody really knows how a company determines UCR values.
Can you protest UCR limits? Sure. Your doctor could write a letter stating why the charges are more than the mythical UCR. Contact your agent, then contact the company itself, and send copies of any letters to your state insurance board. They do investigate.
6. What is the maximum lifetime benefit? Is there a maximum benefit per illness or accident? Lifetime benefits of at least $1 million are a minimum in today's healthcare climate. If you can get a policy with $3 million lifetime maximum, and the rest of the coverage fits your needs, do so.
After you make a claim, some policies restore the maximum if you don't use the policy for a specified time. With other policies, each claim reduces the total amount left, and if you exceed the maximum, you become an uninsured person.
Some policies limit the number of days you can stay in the hospital for each condition. Try to get a policy with no limits, or a policy that lets your doctor make the decision.
Other policies have limits for certain conditions, for example, up to 25 visits for psychiatric care per year, or a maximum benefit of 7,000 for alcohol or drug addiction treatment in any two consecutive years. Outpatient surgery and physical therapy may have limits also. Ask for a complete explanation and study the list of limited and excluded conditions and services. If you plan to have a baby, for example, you want a policy that includes benefits for childbirth, complications of childbirth, and immediate baby coverage.
7. Does the policy require precertification for hospital admission? Many policies require precertification as a cost containment measure. Precertification means that you or your doctor must call the insurance company to get permission before you are admitted to a hospital. You may also have to get precertification for outpatient services. The company may not pay any claims, or may pay a reduced rate, if you do not get precertification.
In case of accidents or other emergencies, you or your doctor may have up to 48 hours after the event" to get precertification. Find out if the precertification office is open on weekends or holidays, and what to do if it is not.
8. What is the claims process? Are benefits payable only to providers, or to me if I choose? How quickly are claims paid? HMOs file claims automatically for you. You have to file the claims for other types of health insurance, except some Blue Cross and Blue Shield plans. Find out how to get the necessary forms and ask questions about filling them out before you actually have to do so. You won't want to cope with an incomprehensible claim form when you are sick. Insurance companies will not pay claims if you make mistakes on the form.
Keep copies of every claim form and every medical bin to check what the company pays for. Charges you have to pay out of your own pocket may be tax deductible.
Your agent can find out how fast claims are paid. If benefits come directly to you, you want the money in the bank before you have to pay the doctor's bills. Usually it is best to have benefits paid directly to the doctor or hospital, with a copy of the statement to you.
9. What are the levels of deductibles and the corresponding premiums? Is the deductible an annual one, or is it a deductible per illness? If per illness, who determines what constitutes one illness? Typical deductibles are $500, $2,000, and on up to $10,000 per year for an individual or a family purchasing major medical health insurance. These high deductibles apply to group policies available from professional organizations and for one-person policies. High deductibles may be a surprise if you have been a full-time employee in a company that paid your premiums with $100 deductibles.
Most health insurance has a limit on your out-of-pocket expenses. Typically, you pay the deductible amount, then the insurance pays for 80% of each claim and you pay the other 20%, up to a total amount like $7,500 per year, then the policy pays 100%. Other policies, with lower premiums, pay on a 50-50 basis. With annual deductibles, everything resets to zero at the beginning of each year.
Most companies charge 10% to 20% more for smokers.
Until I shopped for individual health insurance, I had never heard of a deductible that applied to each illness. Per-illness deductibles are fairly common, and the levels are similar to the annual amounts stated above. I know consultants who are happy with this kind of coverage. Premiums are not much different from the annual deductible type. Be sure your doctor is the person to determine what constitutes one illness.
Some policies reduce the deductible each year that you don't make any claims, down to nearly zero. This feature sounds like smoke and mirrors to me. Does anyone out there have experience with such a policy? Did it work for you?
10. At what rate does the policy cover these conditions?
Outpatient chemotherapy Maternity
Organ transplants Chiropractic
Dental, vision care AIDS
Prescription medications Hospice care
Mental health care
Add other conditions that apply to you, or that interest you. Companies that fully cover these kinds of conditions tend to be more customer oriented than those that don't.
More Health Insurance Considerations
The questions and answers apply most to sole proprietors who do not have family members insured under the same policy. If you have dependents, or if you have employees, you'll need to modify the list to fit your needs. For example, parents of college-age children win want to know if the children are covered under the parent's policy while they are at school.
Part of your evaluation of health insurance companies and policies must include expenses, such as premiums, deductibles, and copayments. Examine also the cost of getting the insurance in the first place. Some companies make you pay for the required physical and lab work. It cost me about $400 for a physical, tests and lab work, and the administrative fee one doctor charged to fill out the form when I changed companies last year. Other companies charge a "start-up" fee. You may get a break on insurance premiums by belonging to a professional organization, but is the break worth the organization's dues if you get no other benefit from belonging? Some health insurance premiums are tax deductible.
Your credit card may have an accident insurance benefit included when you use the card to pay for travel expenses. The cost is built into the cost of the card. But utility companies, department stores, magazines, and telephone salespersons offer certain kinds of health insurance that I recommend avoiding, such as specific accident insurance, cancer or other dread disease insurance, travel insurance, and hospital indemnity insurance. Why? The cost is too high for the benefits provided, and the policies are so restrictive that you might never be able to collect.
If you are healthy enough to qualify, don't hesitate to shop for new health insurance when your premiums rise beyond your budget. For example, I'm saving $35 per month and have a previously excluded condition covered under my new insurance. The rate increase on my birthdate was only 4%.
Buy from a reputable company with a high rating. As with any contract, understand the policy benefits and exclusions, the payment options, grace periods, and all other features of the plan before you sign anything.
What If You Can't Work? is the title of two different articles I used in researching this article. Well, what if.? Disability insurance can help you maintain your family's standard of having, help pay for medical expenses not covered by health insurance, and perhaps protect your business while you are out of commission. Disability benefits come directly to you, and you can use them as you wish.
Disability insurance is often called loss of income" insurance. Typically, disability insurance provides for about 60% of your current income. Policies are available to individuals with varying lengths of payout benefits.
Disability insurance is a "must have" unless you are independently wealthy. Disability insurance may have been a fringe benefit provided at no cost when you were employed full time. As an independent, you will find that it is a significant expense, and the cost rises depending on how much of your income you want to replace, your age, and your occupation. However, once you qualify for disability insurance, you can get a policy on which the premiums do not increase.
"It won't happen to me!" you say? The statistics are stacked somewhat against you. If you are between the ages of 35 and 65, your chances of being disabled for 3 months are about equal to your chances of dying, according to the Health Insurance Association of America. If you are in your 40s now, you are three times more likely to be disabled than you are to die before you reach age 65. According to the American College of Life Underwriters, the average disability lasts more than 5 years, and almost 30% of all disabilities will be permanent (Vaughn 1989, p. 272). The probability of being temporarily disabled is higher for men than for women, but it increases with age for both groups.
Not all insurance companies sell disability insurance, so you'll need to shop around. Examine your income and expenses before you shop. For example, if you are disabled for a year, would you keep your car? What other expenses could you eliminate? What sources of income can you count on other than your earnings from work (interest, dividends, IRAs, inheritance)? How much can you reduce the amount you need to insure?
Let me warn you that comparing disability policies with all their options and categories is more complicated than comparing health insurance policies. These questions and answers will help guide you through the process.
Disability Insurance: Questions and Answers
1. What is the definition of disability in this policy.? Own-occupation, or regular occupation, disability insurance is the most expensive, but it is also the most comprehensive, especially if you are a professional. Other options insure you only if you cannot do any work at all, or something in between. For example, I'm a trained instructional designer, who must meet with clients at their locations and must be able to use a computer to write training materials quickly. If I'm injured and unable to drive or use my hands, my own-occupation policy will pay benefits, even if I could work as a telemarketer.
2. Who determines whether I am disabled? Does the policy include payments for partial disability? You want a policy that lets you and your doctor make the decision about disability. You and your doctor should also determine whether you are partially disabled -- ready for part-time work, for example -- but not able to return to fulltime hours or efforts. Look for a policy that pays partial benefits for partial disability, sometimes called residual disability. This kind of policy also costs more, but the benefits can be much more useful while you are recovering.
Make sure the policy covers you for sickness, not just accidents. After age 50, you are more likely to need disability insurance for illness than for injury, according to the Health Insurance Association of America.
Look for a policy that covers you 24 hours a day, worldwide, whether you are on the job or on vacation.
3. Is this policy noncancellable and guaranteed renewable? How can I change the policy? Noncancellable and guaranteed renewable means that once you sign the contract and the company accepts you, the company cannot cancel the policy or alter the terms as long as you pay your premiums as agreed. Do not buy a disability policy without both noncancellable and guaranteed renewable clauses. Make sure the policy waives paying premiums while you are disabled.
Most disability insurance covers you until you are 65; then you go on Medicare. You may be able to extend the policy until you are 75, for a higher premium, if you continue working.
"Guaranteed insurable" means that you can increase your coverage when your income goes up, regardless of your health or your age. "Guaranteed renewable" means that the company can change the rates for an entire group (occupation, everyone in one state, etc.) and charge you more, but the company has to offer the policy to you. "Noncancellable" means that the company cannot raise the premium and cannot cancel the policy of you use it.
Disability policies may not be as restrictive about pre-existing conditions as health insurance policies, so the challenge for you is to get coverage while you are relatively young, healthy, and insurable.
4. What is the term of the disability benefits? Terms range from 1 to 5 or 10 years, or up to age 65. The shorter the term, the less expensive the policy. When you are comparing policies, be sure to get quotes that match. For example, compare several policies with own-occupation to age 65. Then compare policies with own-occupation for 1 year and residual for 5 years.
5. How long is the elimination period? The elimination period is the length of time after you become disabled before the company starts paying benefits -- 30, 90, or 180 days, for example. Financial advisors recommend having at least 3 months' living expenses in a savings account in case you lose your source of income. You need to decide what you can handle in the short term and how long you can wait for benefits. Be aware that the benefit check will not arrive until 30 days after the end of the elimination period, so allow for that additional time in your planning. Remember that independent consultants do not have any paid sick leave to rely on.
Get a policy with no elimination period if you can afford it. However, premiums are higher for a shorter elimination period. You can save about 20% on premiums by increasing the elimination period from 30 days to 60 days.
6. How long is the waiting period? Disability policies may have a waiting period; that is, after you are accepted, the policy may not go into effect for some time, say six months. If you are disabled during the waiting period, the policy does not pay any benefits. A company might waive the waiting period for accidents that cause disability.
7. How much of my income can I insure? An average amount to insure is 60% of your net income; that is, your profit after subtracting usual and customary business expenses. Your occupation and the size of your income influence the amount you can insure. Use unearned income to lower the amount you need to insure. It is worth finding out whether your mortgage or investments may waive payments if you become disabled.
Health insurance premiums may be partially tax deductible, but if you deduct the premiums on your disability policy from your taxes, you jeopardize the tax-free status of disability benefits.
8. Won't my benefits be reduced by Social Security benefits if I am disabled? Yes, probably your benefits win be reduced by Social Security benefits, but Social Security rejects approximately 70% of disability claims! The eligibility standards under Social Security are extremely strict. To qualify, you must be disabled for at least a year and unable to do any significant work of any kind. You can't qualify if you have not worked at a covered job" for at least five of the last ten years. You should not depend on Social Security for assistance.
9. What about cost-of-living increases? Cost-of-living adjustments, or COLA riders, protect you against inflation. You can usually find a range of COLA amounts to choose from, such as 1% up to 7% per year. Of course, you pay extra premiums for a COLA.
More Disability Considerations
You want an agent who will present your needs accurately to the company that sells disability insurance. The amount of liability you need to insure is a risk you want the company to take on. Commissions on selling disability insurance are fairly high, but you are the one who is insured; make certain that you get what you need, not what an agent wants to sell. Buy your disability insurance from a company with a top financial rating, just as you do for life and health insurance. Remember, if the company goes bankrupt, your insurance is worthless.
You may find a less expensive disability plan through a professional organization than you can find as an individual. Be sure that the organization's dues are worth the savings if the organization offers no other benefits to you.
Before you sign a contract, read it, ask questions, be comfortable that you understand the policy's benefits and exclusions, the payment options, the grace periods, and all the other features of the disability insurance plan.
Insurance is a massive industry, and there is a huge amount of information about insurance for an independent consultant to wade through. In the next issue, I'll identify some key issues for selecting insurance companies and insurance agents.
Adequately insuring yourself and your business is one of the "nuts and bolts" issues of running a successful business. I like to think of insurance as one of the bolts" that helps hold the business together. The nuts" have to do with being extremely good at whatever you do to earn a living.
CFPII: Insurance planning. 1991. Certified Financial Planner Professional Education Program, College for Financial Planning (no author, publisher, or city available).
"Disability: Protecting your earning power is vital." 1989. USA Today, August 21 (reprinted by Provident Companies, Chattanooga, TN).
Edwards, Paul, and Sarah Edwards. 1985. Working from home. Jeremy P. Tarcher, Inc., Los Angeles, CA.
Frick, Betsy. 1991. Health insurance and disability insurance questions. Applied Instructional Design, St. Louis, MO.
Gallagher, Jim. 1994. "Nursing home insurance only worthwhile for a few." St. Louis Post-dispatch. July 11: 8BP.
Health Insurance Association of America, 1025 Connecticut Ave., N.W., Suite 1200, Washington, DC 20036.
The insurance forum. 1993. Insurance Forum, Inc., Ellettsville, IN, Vol. 20, Nos. 9 and 10, Sept. and Oct.
Mau, Ernest E. 1981. The free-lance writer's survival manual. Contemporary Books, Inc., Chicago, IL.
Marino, Vivian. 1993. "Whoa: Learn how to say when' on insurance." St. Louis Post-dispatch. St. Louis, MO. September 17:13D.
Prye, Steven. 1993. Disability insurance a key to good estate planning." St. Louis Post-dispatch. St. Louis, MO. October 25: 10BP.
Quinn, Jane Bryant. 1992. "When health plans fail." Newsweek, Feb. 24: 45.
Quinn, Jane Bryant. 1993. "Safety ratings make, break insurance firms." St. Louis Post-dispatch, St. Louis, MO. October 26: 12C.
Rose, Ronit Addis. 1991. "Are you accident prone?" Portfolio Watch. Provident Life & Accident Insurance Company. Chattanooga, TN.
Vaughan, Emmett J. 1989. Fundamentals of risk and insurance, 5th edition. John Wiley & Sons, New York, NY.
"What if you can't work?" 1991. Business Week, August 19: 120-121.
"What if you can't work?" 1991. Changing Times, May: 53-54.
Betsy Frick is the sole proprietor of two businesses. Apphed Instructional Design provides consulting in training issues, development of customized training programs and materials, technical documentation, and related technical communication services. Resumes from Scratch helps people who need resumes but have never had one, or who need an updated resume for today's job market. She has been the head copy editor for Technical Communication for five years and is the Missouri coordinator of the CIC PIC. You can reach her at 7402 Weil Ave., St. Louis, MO, 63119, 314-781-8502.