The Dutch government is working on a plan to make disability insurance (AOV) mandatory for freelancers and entrepreneurs. The intention of this obligatory AOV scheme is to strengthen the social protection for freelancers and entrepreneurs, hence better shielding them from the financial risks associated with disability. In this way, freelancers and entrepreneurs should not face financial hardship if they are unable to work due to illness or injury. This plan alters several things. It is still under development and is likely to be presented to the House of Representatives in 2024, so we must wait a bit longer before the proposal is finalized. Below is an explanation of what we know so far.
Why was the decision made to make the AOV mandatory?
There are several reasons why the government has chosen to implement a mandatory disability insurance (AOV) for self-employed people:
1. Financial safety net: A key reason is to provide a financial safety net for self-employed individuals who become disabled. Disability can happen to anyone, and the financial implications can be significant, especially for those without a steady salary as an employee.
2. Not shifting risks to the community: When self-employed individuals are uninsured and become disabled, they may end up on social assistance. This is funded with public resources, meaning society as a whole bears the cost. By requiring self-employed individuals to have insurance, this risk to the community is reduced.
3. Equal treatment of self-employed and employees: By introducing the mandatory AOV, the government is trying to equalize social protection for self-employed individuals and employees. This means that the decision between working as a self-employed individual or an employee is less determined by costs associated with the legal form (e.g., taxes and insurance), and more by the nature of the work itself.
This mandatory insurance is still under development. The government is striving to find a balance between providing adequate protection for self-employed individuals and keeping the insurance affordable and feasible. For example, they are considering the possibility for self-employed individuals to opt for private insurance instead of mandatory insurance, provided that the private insurance offers at least the same coverage.
What does mandatory AOV mean for freelancers and entrepreneurs?
A disability insurance is a policy that provides income support if you’re unable to work due to illness or accident. This is particularly important for self-employed individuals, as they don’t have an employer to continue paying their wages if they fall ill. At present, freelancers and entrepreneurs can decide for themselves whether they want to take out a disability insurance. If the proposed changes go ahead, it will be mandatory for all self-employed people to take out such insurance.
Financial safety net: The proposed mandatory disability insurance (AOV) will serve as a financial safety net for self-employed individuals who become disabled. This means that if you become ill as a freelancer or entrepreneur and can’t work, you will receive income support.
Coverage: The standard coverage of this mandatory AOV is 70% of the last earned income up to a certain limit. This is a maximum of 100% of the statutory minimum wage (WML).
Premium: The cost of this insurance (the premium) is expected to be around 7.5% to 8% of your income, with a maximum premium base.
Exceptions: There are some exceptions to who fall under this obligation. For example, the requirement does not apply to director-majority shareholders who are not already insured for employee schemes, and there will also be an exception for conscientious objectors (people who don’t take out insurance on principle or religious grounds).
Transitional arrangement: There will be a transitional arrangement for those who have already taken out private disability insurance. These existing insurance policies will be respected.
Waiting period: There is a waiting period of one year. This means that as a self-employed individual, you have to bridge one year of illness before this insurance begins to pay out. A shorter waiting period can be obtained on the private market if the insurer admits the self-employed individual to the private insurance.
All in all, the idea is to soften the risks of self-employment a bit and to ensure that everyone has some degree of protection against the financial consequences of illness or an accident.
Who does the mandatory AOV apply to?
The proposed mandatory disability insurance (AOV) applies in principle to all self-employed individuals, including the so-called “income tax entrepreneurs” (IB-entrepreneurs), both with and without staff. Spouses who work in the business are also considered insured.
In this context, IB-entrepreneurs are people who own their own business, or individuals who work as freelancers. Spouses who contribute to their partner’s business, but are not formally employees, are considered participating spouses.
However, there are some exceptions to this obligation. The first group exempted are the so-called “conscientious objectors”. These are people who, due to their religious beliefs, do not take out insurance policies.
Another exception is made for director-majority shareholders (DGA’s) who are not already insured for employee schemes. These individuals do not fall under the mandatory AOV. The same applies to people who receive income from other activities, also known as ‘income beneficiaries’.
There is also a transitional arrangement for those who have already taken out private insurance to insure against long-term disability risk. Their existing insurances will be respected under the new rules.
An ‘opt-out’ is also being explored, where self-employed individuals could choose to take out a private insurance with at least the same coverage and premium as in the public insurance.
What is the premium for the mandatory Disability Insurance?
The premium for this insurance is expected to be between 7.5% and 8% of income, but there is a specific limit. This limit, also known as the maximum premium base, is the highest amount on which the premium is calculated. Unfortunately, the exact figure has not yet been specified by the government.
It’s important to understand that these percentages are indicative. This means that the final percentage may change depending on the definitive design of the insurance and possibly other factors.
Lastly, it’s also good to know that the premiums for this insurance will be tax-deductible. This means that these costs can be deducted from your taxable income, which ultimately means you’ll pay less tax.
Who do you turn to if you become disabled?
When the new rules regarding the mandatory disability insurance for self-employed individuals are fully implemented, and you become disabled as a self-employed individual, the process for applying for a payout from this insurance will likely proceed as follows:
Disability Notification: It all starts with notifying your disability. You’ll likely need to do this at the implementation body of the insurance, which appears to be UWV (Employee Insurance Agency). This is the Dutch government agency responsible for implementing employee insurances.
Evaluation: Next, an evaluation of your disability will take place. This process may consist of submitting documentation from your doctor, undergoing a medical examination, and possibly also providing other relevant information.
Decision: Based on this evaluation, the UWV will make a decision on your application. If your application is approved, you’ll start receiving benefits based on the terms of the insurance.
The exact procedures and conditions may vary depending on the final design of the law and execution rules.
What is the coverage of the mandatory Disability Insurance?
The proposal has a few specific features:
Standard Coverage: Basically, the mandatory Disability Insurance provides a payout of 70% of the last earned income up to the limit of 143% of the legal minimum wage (LMW). However, there’s a cap: the payout is a maximum of 100% of the LMW. So, even if you earned much more before your illness, the payout you receive will not be higher than the LMW.
Waiting Period: There’s a waiting period of one year before the payout begins. This means that if you become sick as a self-employed individual, you’ll have to manage your income for a year before the insurance begins to pay out.
Opt-out: There’s also an option to step out of the public insurance (the so-called “opt-out”), but only if you take out private insurance that provides at least the same coverage and premium as the public insurance.
The main idea behind the mandatory Disability Insurance is to provide all self-employed individuals with a basic level of protection. It’s not meant to replace your full income, but to ensure that you can make ends meet if you can’t work.
Is there a deductible?
The government doesn’t explicitly mention if there’s a deductible with this proposed mandatory Disability Insurance. The deductible is the amount you need to pay yourself before the insurance covers the costs. What is mentioned, however, is the concept of a “waiting period” of one year. This means that if a self-employed individual becomes disabled, you have to wait a year before you receive payouts from the insurance. This could resemble a sort of ‘deductible’, as the self-employed individual has to bear the costs themselves during this period before the insurance provides coverage.
In many Disability Insurance policies, the insured can adjust the length of this waiting period (or “deductible period”). A longer waiting period usually results in lower premiums, as the insurer takes on less risk of having to make payouts quickly.
How long does the mandatory Disability Insurance last?
The government doesn’t specifically mention up to which age the proposed mandatory Disability Insurance (AOV) for self-employed individuals in the Netherlands lasts.
In current practice, a disability insurance often continues until the retirement age (AOW age). This is the age at which people in the Netherlands are entitled to the government’s old-age pension. The AOW age can vary depending on your birth year, but is currently somewhere around 67 years.
About the author: Farshad Bashir combines his passion for entrepreneurship with tax advice at Taksgemak to assist businesses and individuals with the complex world of tax regulations. He simplifies the complicated and ensures his clients stay on track. Before diving into the consulting world, he was involved in shaping policy and legislation as a member of the Dutch Parliament. This combination of political experience and tax knowledge makes him an excellent partner for anyone.