Three Ways To Protect Yourself Financially And Legally When Self-Employed

Working for yourself can be extremely liberating. It's great to be able to make your own decisions, be your own boss, and set your own schedule. With that being said, self-employment also leaves you open to financial risk that being in a traditional job does not. If your business suddenly stops earning or you have a bad month, there's nobody there to bail you out but yourself. You also need to be prepared for the possibility of a lawsuit being filed against you. Thankfully, there are some ways to protect yourself financially when you are self-employed.

Purchase a private disability insurance policy.

If you become injured when holding a traditional job, your employer typically has some sort of leave policy through which you'll be paid at least part of your salary until you recover and are able to work again. When you are self-employed, however, you do not have this protection. 

You can protect yourself from loss of income in case of an injury by purchasing private disability insurance. This type of policy is designed to pay you a certain percentage of your earnings for a certain period of time if you become injured. For instance, you can find policies that will pay 75% of your annual income for up to 6 months after an injury, and others that pay 60% of your income for up to 1 year after injury.

The longer the payout period -- and the higher the income percentage paid -- the more the policy will cost to purchase. So, weigh your expenses and actual needs when choosing a policy. If you are bringing in $100,000 a year but investing much of that income, you may be fine with a low-cost policy that will only pay out $40,000 a year. On the other hand, if you are earning $40,000 a year and putting almost every penny towards bills, you may want to pay a bit more for a policy that gives you 75% or 80% of your income.

Always keep a lawyer on retainer.

It's a good idea to keep a lawyer on retainer so that if you ever do need to appeal a disability claim with your insurance company, defend yourself when a customer files a civil case against you, or reword your contract with clients, you have someone to turn to. Try meeting with your lawyer on an annual basis to update them on how your business is going and any changes you have made. They can look over your contracts to ensure everything is worded appropriately and address any concerns you may have about an insurance policy you're considering purchasing. 

It's not uncommon for a disability insurance company to deny your claim the first time around. If this happens, bring the problem to the attention of your attorney. They will help you re-file the disability insurance claim in a way that's less likely to get it rejected.

Save an emergency fund.

Even traditionally employed people should have an emergency fund. But it's even more important when you are self-employed. This is a stockpile of cash that you can rely on if you run into an emergency situation, like a month where you just don't have any business or clients are late making payments. 

Most experts recommend having at least three months' worth of income in your emergency fund. You can save this up slowly over time, contributing a few hundred dollars per month until you reach your goal. Keep the funds in a high-yield savings account that you can access easily if needed.

Many people make substantial incomes and become quite successful through self-employment in a range of sectors. However, you need to make some moves to protect yourself financially and legally so that your own independence in the workplace does not accidentally lead to financial ruin instead of success.