Personal Coverage: Don’t Gamble with Minimal Protection

Illustration of a blue-collar worker at a roulette table in front of an oil refinery, symbolizing the gamble of choosing minimal personal coverage. The worker, dressed in a hard hat and safety vest, cautiously places his chips, highlighting the risks associated with inadequate WCB coverage, including injury costs and lost wages.

Minimal Coverage Can Leave You Unprotected: Understand the True Costs

For self-employed workers, opting for personal workers’ compensation coverage with the Workers’ Compensation Board of Alberta can be an essential safeguard against the financial consequences of a workplace injury. However, a common pitfall among business owners is choosing the minimum coverage available. While the lower premium may seem attractive initially, it can have significant implications if you’re ever injured. Let’s explore why this might be a decision you regret—and how you can protect yourself better.

Understanding Personal Coverage

Personal coverage is designed for business owners, partners, and directors who want to protect themselves against work-related injuries. This coverage is optional, and the minimum coverage amount for 2024 is set at $33,400. While having some form of coverage is better than none, self-employed individuals must understand that this minimum amount equates to a weekly compensation of just $481.57 if they are unable to work due to injury.

Now, imagine trying to live off $481.57 a week. For most people, especially business owners with financial responsibilities such as mortgages, utility bills, and family expenses, this amount may not be enough to sustain their lifestyle. No one wants to think about getting hurt at work, but accidents happen. If you’re a self-employed person who relies heavily on your income to support yourself or your family, the minimum coverage might leave you struggling to make ends meet.

The Risk of Underestimating Your Coverage Needs

When purchasing WCB coverage, it’s critical to base your coverage level on your actual income and anticipated needs in the event of an injury. The coverage amount you choose directly influences the benefits you receive. It’s easy to see why some self-employed workers might opt for the minimum coverage—after all, it keeps their premium costs low. But if you’re unable to work due to injury, this choice could significantly limit your compensation benefits.

Additionally, if your annual income exceeds the minimum assessable amount but you’ve only purchased the minimum coverage, you’ll be shortchanged. You may think the odds of getting hurt are slim, but if you’re suddenly faced with medical bills and lost wages, having inadequate coverage could be financially devastating.

Self-Employed Workers and Income Verification: A Potential Pitfall

Here’s another important aspect self-employed individuals often overlook. WCB bases compensation on your verified earnings. So, if you choose a higher coverage amount, you need to prove that your earnings align with the coverage purchased. If you cannot verify earnings that match or exceed your chosen coverage level, WCB will default to the lesser amount between the coverage purchased and your verified earnings. And if that amount is below the $33,400 threshold, your benefits will be reduced accordingly.

Let’s take an example:

Scenario: Joe Dirt runs his own business and decides to carry $100,000 in personal coverage. However, he only draws $50,000 as a salary to minimize his tax burden. If Joe gets hurt, he might assume his compensation would be based on the $100,000 coverage he purchased. However, when WCB verifies his income, they find he only declared $50,000. As a result, his compensation is based on the lower, verified earnings of $50,000—not the $100,000 coverage he paid for. This misalignment can come as a shock, especially if Joe had based his financial planning on the higher amount.

What Counts as Earnings?

It’s crucial to understand what WCB considers as earnings. For self-employed individuals, wages or salary taken as T4 income, dividends paid in lieu of salary, or business income (net of expenses) reported on tax returns may be included. However, retained earnings or other forms of investment income are not. Therefore, if Joe had also taken out $50,000 in dividends from his business, WCB would likely count those as earnings, raising his verified earnings to $100,000. In contrast, retained earnings would not count, as they are considered reinvestments rather than personal income.

This verification process underscores the importance of maintaining accurate and transparent financial records if you’re self-employed and opt for WCB coverage. Ensuring that your declared income matches your coverage amount not only maximizes your benefits but also prevents unpleasant surprises during a claim.

The Takeaway: Avoid the Minimum Trap

While the minimum personal coverage offers a safety net, it may not be enough for the realities of running a business and managing financial obligations, especially if an injury prevents you from working. It’s essential to carefully consider your coverage needs based on your actual earnings and financial responsibilities.

If you’re a self-employed worker:

  1. Evaluate Your Earnings Honestly: Don’t underestimate your earnings just to reduce your tax burden. It could come back to haunt you in case of an injury.
  2. Understand the Limitations of Minimum Coverage: Know that $33,400, translating to $481.57 a week, may not sustain your lifestyle. Consider opting for a higher coverage amount if your income supports it.
  3. Document Your Earnings Properly: Make sure your financial records are consistent with the coverage amount you purchase. If you supplement your salary with dividends, ensure these are recorded and declared to maximize your compensation.

In the end, preparing for the unexpected is a key part of managing your business risks. It might be tempting to save a few dollars upfront by opting for the minimum WCB coverage, but this decision could have long-term consequences if you ever find yourself unable to work. By choosing a coverage level that accurately reflects your income, you can protect yourself and your family from financial hardship and focus on what you do best—running your business.

Remember: Think twice about going for the minimum. It’s your livelihood on the line.

Call (780)-340-5727 to speak with our 541 Eagleson Wynd, Edmonton T6M 0Y4 team for free.
Picture of Ben Barfett

Ben Barfett

Ben Barfett, Principal and Consultant, has spent his life in the construction sector, specifically heavy civil, enviro, commercial, and energy. Having held senior roles in business development, technical advisory, and regional management, he earned his stripes in the field and in head office. Conscious of the interplay between commercial, legal, and execution aspects of construction, his business insights are informed by expertise in WCB policy and enhanced with disability-specific training.

Picture of Ben Barfett

Ben Barfett

Ben Barfett, Principal and Consultant, has spent his life in the construction sector, specifically heavy civil, enviro, commercial, and energy. Having held senior roles in business development, technical advisory, and regional management, he earned his stripes in the field and in head office. Conscious of the interplay between commercial, legal, and execution aspects of construction, his business insights are informed by expertise in WCB policy and enhanced with disability-specific training.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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