What every entrepreneur should know about YEL insurance
Are you an entrepreneur? How well do you know your most important insurance? Below you’ll find seven things every entrepreneur should know about the self-employed person’s pension insurance, also known as YEL insurance
1. YEL insurance is the basis of your social security
YEL insurance is the basis of an entrepreneur’s social security – but what does that mean?
The insurance is based on something called YEL income. It is the monetary value of your work input as an entrepreneur. The YEL income is especially important because your social security is calculated based on it. This means that it affects the benefits paid by Kela, such as
- parental allowance
- daily sickness allowance
- sickness allowance on account of an infectious disease.
In addition to these, YEL income determines the level of your unemployment security and the amount of your pension. It also has an impact on the self-employed person’s voluntary accident insurance contribution and the compensation for loss of income paid under the insurance.
The YEL income can have a big impact on your life in unexpected situations. Therefore, it’s crucial to make sure that your YEL income is always up to date. It should, at minimum, correspond to a salary that would be paid to a person with the same professional skills as you on an annual basis for doing your work. In brief: YEL income can be thought of as the sum of money you would pay to another person for doing your work.
When you buy YEL insurance, you make an assessment of your YEL income. The pension company confirms the final amount to you based on the information you have provided on your entrepreneurial activities and your own estimate of your YEL income.
Want to understand YEL income better? Pop over here to read more »
2. The most important thing is assessing your YEL income correctly
According to a study by the Finnish Centre for Pensions (etk.fi), three out of five entrepreneurs underinsure themselves. The same survey shows that 43 percent of entrepreneurs also admit to doing so. Underinsuring poses a risk to the livelihood of an entrepreneur and his or her family. YEL insurance affects the entrepreneur’s entire social security, and the effects of underinsuring may come as an unpleasant surprise
What does underinsuring mean? It means that the YEL income is underestimated in relation to the value of the entrepreneur's work input. It’s important for you to evaluate your work input realistically. It can help to think of the YEL income on a monthly level. Let's look at a few hypothetical examples.
Example 1: What kind of monthly work input does the minimum YEL income correspond to?
The lower limit of YEL income in 2021 is €8,063.57. The monthly work input of an entrepreneur insured with a minimum income is therefore 670 euros. What does this mean in terms of working hours? According to Statistics Finland (stat.fi), the median hourly earnings of Finnish employees in 2019 were €17.9. If this is used as a benchmark, the work input of 670 euros corresponds to a monthly work input of about 37 hours.
Example 2: What would be an YEL income that corresponds to the work input of a full-time employee?
The work input of a full-time employee is about 7.5 hours a day. When this is multiplied by the average number of working days per month (20), the monthly work input is 150 hours. When we multiply this by the median hourly earnings, we get a monthly work input of €2,685. This means a little over €32,000 on an annual level.
3. YEL is a lifelong insurance that offers value for money
YEL insurance cannot be compared to saving or investing, as it is an insurance. It protects an entrepreneur in unexpected situations, like disability. And the pension it accumulates is paid for the rest of the entrepreneur’s life – no matter how long they live.
But what does it mean that the YEL insurance offers value for money? Read the case of Matti below – an example where the amount of pension far exceeds the amount of insurance contributions paid.
Example: Matti is 89 years old. He worked for 42 years as an entrepreneur, but for the past 22 years he has been happily retired. As an entrepreneur, his YEL income was 25,000 euros, which means that he paid almost 250,000 euros in insurance contributions during his career. However, during his retirement he has already received almost 330,000 euros of pension, which is about 80,000 euros more than the amount he paid in insurance contributions. *
* The above is a simplified example that takes into account the life expectancy coefficient and the minimum retirement age but not the wage coefficient or future index increments. The insurance contribution has been calculated at the 2021 level.
4. Unemployment security is tied to the YEL income – and it has its own lower limit
The lower limit of YEL income is just over 8,000 euros. However, this minimum YEL income does not automatically entitle you to unemployment benefits. Unemployment security has its own lower limit, and in 2021 it is 13,247 euros. Your YEL income must be at least equal to this lower limit and you must meet the work requirement in order to receive Kela's basic daily allowance or be able join the entrepreneur's unemployment fund (yrittäjäkassa.fi) to accumulate earnings-related unemployment security. If your YEL income is below this limit, you can apply for a means-tested labour market subsidy from Kela.
5. YEL payments are tax deductible
YEL insurance contributions are a big expense for an entrepreneur, but fortunately they can be deducted in taxation. This means there will be less to pay in the end. And the higher the insurance contribution, the lower the actual insurance contribution percentage.
As an entrepreneur, you can also choose whether to deduct the payments in your own or your spouse’s personal taxation or in your company’s taxation. If you pay the YEL contributions yourself, deduct them from your or your spouse’s personal taxation. It is advisable to deduct the contributions in the taxation of the spouse who has the bigger earnings subject to salary income taxation and other progressive taxation. If your company pays your YEL contributions, deduct the contributions in your company’s taxation.
6. The law does not recognize “light entrepreneurship” – only employees or entrepreneurs
The law does not recognize part-time or light entrepreneurship – it only sees entrepreneurs and employees. This means that the YEL insurance is a mandatory insurance for part-time entrepreneurs as well when certain conditions are met.
As a part-time entrepreneur, you run a business, but you get your main livelihood, for example, as an employee of another employer. It is therefore possible that you work in paid employment and as a part-time entrepreneur at the same time. In this situation, your employer will insure you with the employer’s pension insurance, known as TyEL insurance, and in addition, you will insure yourself as an entrepreneur with the entrepreneur’s pension insurance, YEL.
As a light entrepreneur, you employ yourself and bill your customers via a billing service. You take care of your pension security yourself by taking out YEL insurance when the conditions for it are met.
7. New entrepreneurs get a 22% discount
As a new entrepreneur, you get a 22% discount on your YEL insurance contribution. You will get the discount for the first four years of your entrepreneurship. If your entrepreneurship ends earlier, you can use the remaining discount period for another entrepreneurial period. When you buy YEL insurance from Ilmarinen, you get the discount automatically.
A convenient way to get an idea of what the YEL insurance is going to cost you, is to try our YEL calculator. The calculator shows you the effect of YEL income on the insurance contribution, pension, and social security. You will also see the effect of the discount percentage on your payment.
Hopefully this list gave you an idea of the importance of YEL insurance. You can get the insurance easily and safely directly from our website.
If you want to find out more about the entrepreneur's pension insurance, order our guide for new entrepreneur’s here »
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