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Health, life, and disability insurance for home-business owners

Saddled with bills for computer equipment, supplies and business insurance, owners of home-based businesses might not want to even think about the added expense of health, life and disability insurance. But if you're the only person keeping your business afloat, you could see all your hard work go down the tubes in the event of illness or disability.

As with business liability insurance, the kind of insurance you want depends on how much risk you are willing to take on, as well as your personal and business financial goals. A certified financial planner skilled in insurance issues or an insurance agent certified as a chartered life underwriter (CLU) can help assess your needs, particularly if your business is incorporated and your insurance purchases have tax consequences for you.

There are several basic types of insurance you'll want to consider buying: health, life, "key person" and disability.

Weighing your health insurance options

If you're an employer of one person — that is, you employ yourself — you have two health insurance options: group health insurance, if you qualify, or individual health insurance. (Or, if your spouse has group health, you can go on their plan.)

home business

More health insurance companies today offer group health plans for "groups of one," but this will vary by state. Twelve states have guaranteed issue mandates that require insurers to offer "group of one" health plans to the self-employed, primarily people who have 1 to 50 employees. For more information about what is offered in your state, see Kaiser State Health Facts.

To qualify as a group of one, you may have to show state and federal tax forms to prove that you are indeed a legitimate business, work at least 30 hours a week at your home-based business, and have been in business for three consecutive months — but requirements will vary depending on the insurance company.

You'll have to evaluate whether a group or individual health plan best suits your needs. Individual plans are subject to medical underwriting, which means your health will be a factor in acceptance and price. In contrast, a group plan for small groups will have more liberal underwriting guidelines.

Buying group health for one person

Your local chamber of commerce or business and trade groups relating to your profession may offer group health plans. Additionally, you can go directly to an insurer to shop rates and buy a health plan.

Insurance companies will not typically have higher rates for individuals who go through brokers for group health, but plans purchased through chambers or other organizations can tack on an additional monthly administrative fee, making them slightly more expensive.

What to look for

Your liquidity should be a consideration in determining how much of a deductible you want. Someone who has a lot in cash reserves may be able to afford a larger deductible, and increasing a deductible from $100 to $2,000 can cut health insurance premium payments in half over the course of a year. What you spend in a deductible can be much less than the additional premium.

In some cases, you can save a bundle of money by opting for a health plan that does not cover routine doctor's visits, lab tests or other mundane medical costs — something known as a major medical plan.

The Insurance Information Institute provides a small business insurance checklist to help small business owners figure out which types of insurance fit their needs.

Life insurance might require multiple policies

Life insurance is crucial, especially if you have a business partner who relies on you, or if your home business is the main source of income for your family.

You may need different policies with different beneficiaries.

Home-business owners may have a number of concerns that can be addressed by life insurance: They are carrying business debt; they have a family; they have employees; and they have a business partner.

If you have a combination of needs, you may need different life insurance policies with different beneficiaries.

For example, a form of life insurance — called "ey person" insurance — might be suitable for some home-based businesses. The insurance pays out when the owner of the business or a crucial employee dies. The policy payout infuses the business with cash so that it can continue to operate during a transition in ownership and/or management. If you don't care whether your business continues after your death, you don't need key person insurance. If you have a partner who depends on the business for income, however, you probably need it. Banks and government loan programs sometimes require this insurance.

Disability insurance: A safeguard against illness

Disability insurance is at least as important as life insurance.

In the most basic sense, disability insurance makes payments to you if a physical or mental illness, disease or bodily injury prevents you from working. People of working age are more likely to become disabled than they are to die — making disability insurance at least as important as life insurance, according to the American Council of Life Insurers (ACLI).

In general, the disability insurance needs of a home-based business owner will be no different than those of a regular employee.

One of the options is key person disability insurance. This replaces income when an owner or top manager is unable to work. Some policies can be used for salary continuation, while others provide cash flow to cover a sudden loss of income, profit and other assets.

However, business owners might want to consider a disability policy with a short waiting period before benefits kick in. Waiting periods are usually anywhere from 30 days to 180 days after the onset of the disability or illness, but those can be negotiated. If your business is your main source of income, you can't afford to wait many months before receiving disability benefits. Bear in mind, though, that shorter waiting periods will mean higher premiums.

Buying disability insurance coverage if you operate your business out of your home is often more difficult than if you worked out of an office downtown. The reason generally lies in claims administration. Simply stated, it is easier for an insurance company to verify that you are disabled and not working if you normally travel to an outside office to do your job than if you only need to walk from your bedroom to your home office a couple rooms away. When looking for this kind of coverage for your home-based business, it makes good sense to work with an experienced broker.

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