Starting a business is often equivalent to full dedication and putting the here and now ahead, trying not to think too much about the most worrisome issues that may arise in the future.
A common characteristic of entrepreneurs around the world is that their life seems a balancing act on a tightrope. Their work demands full dedication, they are constantly making important decisions and they need to focus on today's needs. Even so, the possibility of becoming ill, suffering a disability and becoming unemployed, as well as the worrying issue of retirement are always present in their minds.
We have all met a self-employed person who claims that they cannot afford to get sick because they would run out of income, especially if they work alone. These potential problems are often perceived as fearful issues to be resolved when the time comes. However, bad things always happen when they are least expected. So when it comes to business, it is better to be safe than sorry.
In Finland, entrepreneurs or self-employed workers have at their disposal powerful legal tools such as YEL insurance to prevent and limit the negative effects of any unwanted event.
The basics of YEL insurance
With the help of an expert, in this article we are going to explain the basics of YEL insurance, the safety net that allows the self-employed to free themselves from some of these worries, while contributing to have the right to collect social benefits such as unemployment protection and a pension when retirement comes.
Anton Ropa, from the pension insurance company ELO, which serves a third of Finnish companies and more than 40% of the self-employed in Finland, remarks that "the contributions to YEL insurance are much more than pension insurance, because the entrepreneur's level of social security depends on it."
YEL insurance is not a voluntary contribution. Entrepreneurs must pay their YEL income if they exceed a certain level of annual premiums. Every year, the Finnish authority for pensions sets its lowest limit. For 2021, it will be compulsory for those entrepreneurs and self-employed whose YEL income exceeds 8,063.57 euros.
Young entrepreneurs, for whom pensions still sound like something far away, as well as many self-employed people who are just starting out, tend to under-insure themselves and to use the lower limit as the basis for the YEL income. But they must bear in mind that by doing so they are also minimizing the amount of their eventual social benefits. For this reason, experts recommend increasing contributions as business and income grows.
As a general rule of thumb, Anton Ropa says that "YEL income should be as high as the estimated value of the work the entrepreneur does for the company."
"Measuring the annual value of that work and dividing it by 12 is a good way to estimate your ideal monthly contribution amount, then you can decide if you want to pay it month by month, in six payments, in four, three... or all in one payment." he adds.
Pension insurance expert Anton Ropa. Photo: Elo.
The income reported and confirmed for the YEL pension insurance policy has a direct impact on the amount of pensions.
For entrepreneurs, accrual of earnings-related pension starts at the age of 18. According to the current Pension's Act, the pension accrual rate (from YEL income) is 1.5% of annual income, regardless of age. There is a temporary exception to this general rule: the 1.7% accrual rate applies to persons aged 53 to 62 years during the period 2017-2025, which was established as a transition period in the reform of pensions in 2017.
"In practice, if the annual YEL level is 10,000 euros, it will accumulate the pension by 1.5%. That will be the accumulation for the whole year and after retirement it will be paid until the day you pass away," Ropa clarifies.
Social benefits paid by Kela
But the benefits of YEL insurance go beyond the accumulation of a retirement pension.
YEL insurance also plays a major role in the calculation of social benefits paid by the Finnish Security Institution (Kela), for example in case of unemployment, sick or parental leave, the amount of which depend on the YEL income level.
"For example, in the case of sick leave, the calculation is made from the contributions of the last twelve months," explains Ropa.
In the case of unemployment benefits linked to earnings from entrepreneurial activity, there is also a minimum level of YEL income (set at 13,247 euros for the year 2021) that entitles the self-employed to receive social benefits higher than the basic labor market subsidy.
Again, the final amount increases depending on the level of contributions of each entrepreneur.
Increasing the YEL income
YEL insurance allows entrepreneurs to change the amount of YEL income depending on the progress of the business.
"Basically, entrepreneurs can change the level of YEL income as many times in the year as they want. During their entrepreneurial career they will have good moments, in which they will surely decide to invest a little more in securing their future. If they are ELO's customers, they can do it directly online or by contacting our customer service," says Ropa.
The basic rule is that the more they contribute the more future benefits they will get. But they must be careful because if they wait too long to raise the amount of YEL income they can be late and not accumulate enough pension. And it should also be noted that the system does not allow paying contributions with retroactive effect.
Finland, like many other countries, has seen in promoting entrepreneurship a way of reducing unemployment and encouraging innovation. Therefore, entrepreneurs in Finland now have the opportunity to access initial discounts of 22% during the first four years of activity when taking out YEL insurance.
Do you need YEL-insurance? Read more and take insurance from Elo.