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Freelancers – How to make sure you get the right coverage from your keren pensia

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legal warning: The information here should not be understood legally as financial advice. If you believe anything on this site is in error, please contact me. I am always open to corrections, new ideas, and new opinions...

Hi.  It’s been a while.

One of the most common and complicated issues I encounter is assisting freelancers (atzmaiim) in setting up the insurance in their keren pensia.  As I wrote previously regarding the insurance in a keren pensia, one can set up a keren pensia so that he or she will receive up to 75% of their salary in the case of disability and 100% for spouse, kids and dependent parent in the case of death (see this post for more details).  For a salaried worker, the salary which determines the coverage (שכר קובע) is determined by the average recent salary upon which the percentages were paid in, but for a freelancer this is very complicated.  Suppose that a freelancer makes an average of NIS 11,000, but only pays in NIS 500 a month, what kind of coverage will he or she have?

The default for all freelancers paying into a keren pensia meikifa is that whatever the person is paying in is 16% of their salary.  This means that if Joe is earing around NIS 11,000 a month, but only contributing NIS 500 a month to his pension, if he fully disabled, his salary will be calculated as NIS 500 / 16% = NIS 3,125.  He will then get only 75% of that (NIS 2,344) and will have to live with this tiny bit of money for as long as he is disabled.

There is a solution:  You can arrange to set it up so that what you are paying in is as low as 10% of your salary.  In order to do this, you usually need (1) a letter from your accountant that states what your expected annual earning will be (2) to fill out a form from the insurance company.  It is important that you communicate with the company to make sure everything is set up correctly.  As a reminder, once you have an assurance in writing from the company or your agent, they are legally responsible, so make sure to get it.

But returning to our case of Joe above, we see that Joe still does not have enough money to cover him.  In order for Joe to be covered completely, Joe must increase his monthly contributions to NIS 1,100 a month and set it up so that they are calculating is as 10% of his salary.  Remember, just depositing NIS 1,100 isn’t enough, he has to make sure they are calculating it as 10% of his salary, so that if he gets disabled he’ll get NIS 8,250 (75% of NIS 11,000) not NIS 5,156 (75% of NIS 6,875, which is 1,100 / 16%).

This gets complicated for atzmaim who only pay into their pension at the end of the year.  Usually your salary is calculated based on an average of what you’ve paid in over the past 12 months, so it you are an atzmai who pays in a lot at the end of the year, then once the year-end money goes in you will be okay, but until then, you will be underinsured.  You can either speak to the insurance company to make some kind of arrangement or else purchase a private אובדן כושר עבודה to help you bridge those first 12 months.

The important takeaways here:

  • If you are a freelancer with a קרן פנסיה מקיפה, your שכר קובע is a very important issue and you must make sure that you are contributing enough so that it is set up correctly.
  • This is the most common error I have seen with freelancers.
  • It is incumbent of the freelancer, not the agent, nor the company, to make sure this is set up correctly.
  • Always get it in writing – that is the only way you know that you’re covered. Even an e-mail is okay as long as it is from the company or agent and the coverage is stated explicitly.
  • If you are going to pay in a lot at the end of the year, then the first year is a problem. Consider a separate אובדן כושר עבודה policy to cover this period.

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