The biggest risk for the self-employed is not being able to work due to illness or trauma. Maya Fisher-French discovers that insurance products are not designed for
The growth in the so-called gig economy is one of the biggest labour trends globally. This is when
individuals with a specific set of skills leave mainstream employment to offer their services
freelance. This is partly driven by a desire for more flexibility but mostly from the reality that companies are no longer hiring permanent staff. Instead of being paid a regular salary, workers are self-employed and paid for each “gig” they do.
Personally, I have been self-employed and working gigs for 14 years and my biggest risk is not being able to work if I become ill or have an accident.
While risk cover is important for everyone, when you work for yourself there is no sick pay or employee benefits – if I cannot bill my hours, I don’t get paid.
The starting point is having an emergency fund that covers up to three months of expenses or, at the very least, having at least one month of expenses covered.
The next step is to take out income protection, however, this is not as simple for a self-employed
person as it is for someone who receives a regular income. Sadly, it appears that few South African insurers are bringing products to market that are relevant to self employed individuals. As a simple example, insurers do not provide the ability to pay lump sum premiums, yet I should be able to purchase my insurance during good billing months and still be covered during poor billing
What I have also discovered is the challenge of knowing what you will actually get paid at the claims stage if you have a variable income. One of the rules of income protection or disability cover is that you cannot be in a better financial position after the claim than you were before – but how does that work when your income is variable and how is the income determined?
How much of my income will be paid out?
When you initially take out cover, it will be based on your income at the time. However, according to Jaco Gouws, protection product head at Old Mutual Personal Finance, the payout will be based on the client’s income at the time of their illness or injury, not necessarily the income that was insured (assuming that the amount insured was equal or higher). In other words, if I was
insured and paying a premium based on R40 000 income per month, but I had a bad year of billing before my claim, earning on average R20 000 per month, I may only be paid out based on the last 12 months of income.
This is very important if you are leaving a company to start your own business. If your cover is based on your corporate salary, it may take you a year or two to build up to those income levels, but if you are injured or chronically ill, your claim will be based on your new self-employed income level, according to both Old Mutual and Discovery Life. So you need to notify the insurer so the benefits and premium are based on the new occupation and salary.
Insurer BrightRock has a different approach. CEO Schalk Malan says clients can maintain their full cover while in a lower paying job, or even if they go on extended leave or become unemployed.
“Self-employed individuals have to let us know when they stop working, and the cover will remain in place for up to 12 months, regardless of the form of employment,” says Malan, who adds that in the case of a permanent disability, after 12 months of not working or earning less, clients’ permanent expenses cover (and payouts on claim) can maintain the higher levels, provided proof of income was received for the original income.
“If a client submitted proof of income at the inception of the policy and lodges a permanent claim, we are not concerned with the income at claims stage, as the client has been paying premiums for the higher cover amount.”
Malan adds that at the time of the claim on temporary expenses, although BrightRock requires proof of the income, they don’t require proof of loss of income – in other words, the client does not need to prove that they have lost any income as a result of being temporarily disabled.
“Imagine how hard this is for someone who has a fluctuating income, or for clients where there’s quite a lag between the work having been done and the income being received. The compounding effect of this is that when they aren’t working because of an illness or injury, they still get the funds for work done a few months before, so they can’t prove a loss of income, and so can’t get paid out from their insurer.
“Then, when they return to work, there’s no income for the work that they would have done during the period that they were booked off. There’s now a serious gap in their income until they can get paid for the work that they only do after their recovery, which might be quite a few months. At BrightRock we try to avoid putting clients in this type of situation.”
How is your income calculated?
As you cannot provide a payslip, insurers calculate your income both at application stage and at claims stage based on your financial statements, SA Revenue Service returns or bank statements.
Old Mutual considers the share of average monthly sales/fees earned, less the share of cost of sales and less the share of business overhead expenses, averaged over a period, at Old Mutual’s discretion, of 12 months. If earnings are of a fluctuating nature, at Old Mutual’s discretion, it may be averaged over a period of, at most, 36 months.
According to Discovery Life head of market insights, Andrew McCurrie, if the income is of a variable nature, Discovery Life may determine a period other than 12 months to calculate average monthly income.
Whether you are a sole proprietor, partner, member of a close corporation or director of a private company, Discovery Life will calculate the monthly share of fees for services rendered and gross profit from trading activities, less the individual’s monthly share of the business overhead expenses and tax.
As benefits are tax-free, deducting tax is not an issue, however, the critical point here is that overhead expenses are deducted from the income calculation. The problem is that overhead expenses do not disappear when you are unable to work. There may still be rent, connectivity costs, website management, insurance and car finance expenses. Moreover, some of the overhead expenses that a self-employed person may deduct form part of day-to-day expenses. For example, if you work from home you can deduct up to 20% of your mortgage interest and household running costs as overheads.
Gouws says in this case they take into account 17.5% for fringe benefits, but this may be insufficient. It is also worth noting that if your business is incorporated, then only the salary you withdraw each month would be considered for income assessment.
Financial planner Markus Bauriedl, says one could consider covering the business overheads of an
individual, especially for a professional or sole proprietor, through an overhead expenses benefit.
“These are typically overheads that would continue being incurred even when the individual is unable to work. Only certain overhead expenses would qualify, however, which is dependent on the occupation of the individual. Furthermore, it is important to note that an overhead expense can also only be taken as a temporary benefit and does not apply as a permanent expense benefit,” he explains.
What is clear is that firstly it is best to get good advice and ask a lot of questions before taking out
cover. Secondly, the industry needs to start focusing on this growing market for which insurance is equally, if not more, valuable, by creating relevant products. – ends –
Additional cover to consider
Bauriedl recommends a severe illness benefit in conjunction with an income protection benefit, as it is triggered on either a recognised trauma event or the diagnosis of an illness covered under the
additional health benefit, without it necessarily resulting in the inability to work.
“In terms of my experience, many lower severity illness claims are triggered with clients still being
able to work, such as in the event of cancer, mild heart attacks, mild strokes and trauma events where they can return to work either immediately or soon.
“In this case income protection will not kick in but they are not able to work optimally and their
income is affected. Some insurers, like BrightRock’s trauma IQ benefit, focus on trauma events a lot more than most other insurers, making it particularly relevant to the younger and more active
market that may be more exposed to trauma-related claims”.
Financial planner Sylvia Walker argues that good medical cover is equally as important.
“Many self-employed people cannot afford the full spectrum of cover needed in case of illness, so a
more practical approach would be to belong to a good medical aid, so medical costs are taken care
of, and then the access to cash, in the form of critical illness cover, that can be used in whatever
way it is needed.
“That’s what is so great about this cover – the flexibility it provides. It’s not just for medical expenses, or loss of income, et cetera. It buys time to heal, a very important consideration for someone who is working for themselves.”
- This article was first published in City Press (page 10 – City Press Business) on Sunday, 2 September 2018.