Disability Insurance for Self-Employed Workers

Working for yourself has its perks, but group disability insurance isn't one of them. However, disability insurance remains just as crucial for self-employed individuals.

Consider this: What if a disability prevents you from working for months? How would you support your family?

That's where disability insurance for self-employed professionals can be a lifesaver. It covers your expenses and keeps your business afloat while you recover.

Don't overlook this vital coverage - it secures your financial future in the face of the unexpected.

What Self-Employed Professionals Need to Know About Long-Term Disability Insurance

Disability insurance policies are either short-term or long-term. Short-term disability insurance premiums covers temporary loss of income due to illness or injury. Most of these policies issue monthly benefits/monthly payments for up to six months. Long-term disability coverage, in contrast, provides a steady income stream for longer periods of time, for example, two, five or ten years, or until retirement.  

Long-term disability insurance coverage offers more robust income protection compared to short-term disability insurance coverage because the replacement income lasts longer and costs might be similar. That is why it should be a part of every self-employed professional’s financial plan.  

Long-term disability plans replace a part of your income before the disability — typically anywhere from 60% to 80% of your gross income. Since the insurer deposits the money directly into your bank account, you are free to use the funds however you like.  

Long-term disability insurance covers all medical conditions that prevent you from working for longer periods of time. The specific details of what qualifies as total disability will vary depending on your insurance provider.  

Some people think long-term disability coverage makes sense only for people with risky jobs, but nothing can be farther from the truth as it is also beneficial for the self-employed and others. Research shows 9 out of 10 disabilities are due to illness rather than accidents. ‍

Here are some of the common medical conditions that qualify for long-term disability benefits:  

• Multiple Sclerosis
• Cancer

• Chronic Fatigue Syndrome
• Bipolar Disorder
• Fibromyalgia
• Crohn’s Disease
• Lupus

• HIV/AIDS
• Degenerative Disc Disease

Can I get Disability Insurance if I am self-employed?

Absolutely!

Self-employed professionals can and should consider purchasing disability insurance. 

While being self-employed may bring some unique challenges, it does not necessarily make qualifying for disability insurance more difficult. The process for obtaining an individual disability insurance policy for self-employed individuals is generally the same as for employees.

Having disability insurance can be a lifeline for self-employed professionals, as it ensures they have a steady source of income to cover living expenses and business costs if they are unable to work for an extended period. 

When considering disability insurance options, self-employed individuals should assess their specific needs, including the level of coverage required and the elimination period, to find a policy that best aligns with their circumstances and offers comprehensive protection.

The insurance company will base coverage decisions for the self-employed on the following things:  

• your age, gender, and health
• your annual income
• the industry in which you work.

As a business owner, when applying for disability insurance, the insurance company will consider not only your personal information but also various aspects related to your business. This includes your company's annual income, the total number of employees, and other relevant financial and operational details.

Insurers take these factors into account to assess the overall financial risk associated with your disability insurance policy. The size and profitability of your business can influence the coverage amount you may qualify for and the corresponding premium rates.

It's essential to provide accurate and up-to-date information about your business to ensure that your disability insurance policy adequately reflects your financial needs and offers comprehensive protection for both you and your business.

How do insurance providers assess your income?

The coverage amount and the cost of insurance depend in part on your yearly income. The insurance company uses a process called financial underwriting to determine the maximum amount of coverage and maximum benefit period it can offer you as a self-employed individual. This is largely done to ensure your disability benefits are appropriate for your current living standard.  

An underwriter will look at your net worth, gross annual income, and unearned income when you apply. The underwriter will determine your disability insurance income on the basis of the individual tax returns that you submit with the insurance application with your information. If you have ever filed for bankruptcy, that will also be considered.

How do insurers determine business income?

If you partially or fully own a business, the insurer will calculate your annual income based on the following:  

• your company’s legal structure
• the percentage of the business owned by you
• how much your business makes in a year
• your annual salary
• your annual bonus and commission.

Disability insurance for contract workers and freelancers

In most cases, independent contractors and freelancers neither own a business nor are a legal employee of a company. These include freelance journalists, freelance writers, personal trainers, artists, freelance website developers, and rideshare drivers. Disability insurance, however, is just as important for these self-employed professionals as it is for a salaried employee or a business owner/employer. In the event of disability, the benefits can help them cover expenses and live comfortably.  

Freelance and contract professionals can qualify for a disability insurance plan as long as they can submit proof of two to three years of freelance income. The process of financial underwriting for these individuals is similar to the one for business owners. Disability insurance companies will review your last two or three years’ income tax returns to calculate your average annual income. Based on your average annual income, they will decide how much coverage to offer you.  

How does it work?

When you buy disability insurance for self-employed professionals works pretty much the same way for salaried professionals. If you become ill or are injured and meet your policy’s definition of total disability, you will receive monthly benefits for a pre-defined period.  

There are many options for plans for self-employed individuals. Therefore before you sign up for a disability insurance plan, look into how it defines total disability and other terms to ensure your coverage is exactly what you need as an self-employed individual.  

The Definition of Disability

Disability insurance policies define total disability as own-occupation or any-occupation. If your policy follows the own-occupation definition, your disability insurance benefits will be paid if a disability prevents you from performing the main tasks of your chosen profession, even though you are able to work in another profession. For example, a serious hand injury will prevent a surgeon from performing surgeries, but he or she could still work as a lecturer or a medical administrator.  

The any-occupation definition, in contrast, is more restrictive. You are eligible for the replacement income only if your disability is so severe as to prevent you from engaging in any occupation for which you are reasonably qualified, based on your education, work experience, and expertise. Whether you take up another job after being disabled is not the deciding factor for receiving benefits. If the insurer judges you fit enough to work in another capacity, it will not issue the monthly benefits. Continuing with the above example, a hand injury will not qualify the surgeon for benefits if his or her policy defines total disability as any-occupation.  

Waiting Period  

Long-term disability insurance policy plans include a waiting or elimination period. The waiting period is the amount of time you must wait before benefits commence when you become disabled. Most policies have a waiting period of 90 to 120 days, although it can be anywhere between 30 days to two years.  

Because disability benefits are not issued immediately, it is important to have a sizeable emergency fund. This money can help you maintain financial stability until you start receiving the replacement income.  

Benefit Amount

This refers to the amount of money or monthly benefit the insurer will pay you each month if you become disabled. Disability benefits are proportional to your gross salary and typically replace 60% to 80% of it. For example, if you make $400,000 a year, the maximum yearly cash benefit you may be approved for is $320,000, which roughly comes to a monthly benefit of $26,666.  

Benefit Period

The benefit period, also known as the payout period, is a crucial aspect of long-term disability insurance.

It determines how long you'll receive replacement income if you become disabled and unable to work. This period can vary among insurers, ranging from as short as two years to lasting until your retirement age. Choosing the right benefit period is essential to ensure adequate financial protection in case of a disability.

Consider your financial obligations and the potential duration of a disability to make an informed decision that aligns with your needs and long-term goals.

Renewability

Some self-employed disability insurance policies come with a promise that the insurer will neither cancel coverage nor increase the premium rate. These policies, called non-cancellable and guaranteed renewable, offer the maximum benefit period and peace of mind.  

But if you do not have a consistent income, you may not qualify for such a policy. In that case you can opt for the second-best option: guaranteed renewable. The insurance carriers guarantee it will not cancel your policy, although your premium rate can go up if the insurer receives more-than-expected number of claims in your category.

Riders

Riders are optional provisions that provide added flexibility or disability insurance benefits, usually for a small fee.

‍Some of the most common add-ons available with a disability insurance plan include:  

Future increase option

The future increase option is a valuable rider offered with some long-term disability insurance policies.

With this option, you have the flexibility to purchase additional disability insurance at specific future dates without undergoing any underwriting process. This means you can easily increase your coverage to keep up with your growing income and evolving needs.

By having this rider in place, you can proactively ensure that your disability insurance remains aligned with your financial circumstances, providing you with enhanced protection and peace of mind as you progress in your career and life.

Partial disability benefits

Partial disability benefit riders can come in handy if you are able to perform some, but not all, of the duties of your job due to disability. There are two main types of partial disability benefits: basic partial disability rider and enhanced partial disability rider. Both work in pretty much the same way, but the enhanced rider has a lower threshold for loss of income.

The basic partial disability rider pays benefits if you suffer at least a 20% loss of income in your occupation due to disability. By contrast, an enhanced partial disability rider allows you to collect disability benefits with a 15% loss of income.

Cost of living adjustment (COLA) rider

The Cost of Living Adjustment (COLA) rider is a valuable addition to long-term disability insurance policies.

This rider ensures that your monthly benefit increases by a fixed percentage, typically between 3% and 6%, to keep pace with annual inflation. It's important to note that the benefit adjustment only takes effect after you start collecting benefits, helping to maintain the purchasing power of your disability payments over time.

Return of premium rider

The Return of Premium rider offers an attractive feature. If you opt for this rider, and you cancel your coverage without ever filing a claim, you'll receive a portion of the premiums you've paid. It provides a sense of financial security, knowing that you have the option to recover some of your investment if your circumstances change, and you no longer need the coverage.

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How much does Disability Insurance cost?

Your self-employed disability insurance plans depends on many factors.

These include:

Your occupation

What you do for living strongly affects your disability insurance premiums. The risk of injury is higher in some jobs than others, so a construction worker will receive higher premiums than a copywriter.  

When you are buying disability insurance, the insurer assigns you one of the five occupation classes — 4A, 3A, 2A, A, B. The risk of disability — and consequently, the premiums — increases from 4A to B.  

The best occupation class (4A) is typically reserved for professionals, senior executives, medical specialists, etc. In contrast, the B class rating usually goes to those with extremely physically-demanding jobs, such as construction laborers.  

When assigning you an appropriate occupation class, the insurer considers your job duties, employment history, and occupation claim history rather than just the job title. Some jobs are easy to classify. For instance, assigning a suitable occupation class to doctors, lawyers, copywriters, and stonemasons is straightforward. But in some situations, things are not easily distinguishable. Assigning the right class to a small-business owner who often wears various hats — payroll, production, manual tasks, and more — may require more effort on the part of the underwriter.  

Keep in mind that your original occupation class may qualify for an upgrade later, if certain conditions are met. For instance, if you initially received a 2A occupation class rating, the insurer may upgrade you to 3A after a few years, provided you meet the income threshold for this class. The upgraded class will reduce your premiums, so do follow up with the insurer if your initial rating is low.  

Your income

Disability insurance usually replaces 60% to 80% of your pre-disability income. That means someone earning a six-figure salary will be approved for a bigger payout — and as such will pay a higher monthly premium — than someone on a lower salary.

Your age

The risk of disability increases with age. Therefore, younger applicants receive better rates and options than older ones.  

Your health

Certain illnesses may increase your risk of disability. If you have a serious underlying condition, the insurer may ask you to pay more for coverage or approve you with a pre-existing exclusion clause. That means the insurance carrier will not cover any disability caused by the pre-existing condition.

Your gender

Did you know that women have a higher risk of disability than men? For this reason, women pay anywhere between 25% and 75% more for disability coverage. This is the opposite of life insurance, where men receive higher rates.

Waiting and Benefit Periods

The longer the waiting period, the lower the monthly premiums. With the benefit period, it is just the opposite. Policies with longer benefit periods cost more, other things being equal.  

Riders

Riders help you tailor the disability coverage according to your needs. But each rider you add also increases the cost by a little.  

Disability Definition

Policies that define total disability as own-occupation are more expensive than comparable any-occupation plans.

Business overhead expense insurance

If you own a business or run a professional practice, it might be worthwhile to consider business overhead expense insurance in addition to a disability insurance policy plan for a self-employed individual.  

Business overhead expenses will not stop if you lose the ability to work. For this reason, self-employed individuals should also consider this as It covers expenses such as:

• employee salaries

• rent
• property taxes
• utilities
• rent
• interest on a business loan, if you have taken one.

The waiting period for these policies is usually smaller than for individual disability insurance policy plans. They also tend to have shorter payout periods, usually not more than 24 months.  

This insurance may be a good option for professionals who run a practice whose revenues depend solely on their ability to work. These include physicians, dentists, accountants, engineers, and lawyers.

Is Disability Insurance worth it for self-employed professionals?

Self-employed disability insurance is recommended for anyone who earns a paycheck.

For self-employed individuals, it is absolutely necessary.  

Being your own boss has many advantages, but you miss out on essential benefits, including group disability coverage, available to many traditional employees. An individual disability insurance policy plan and a business overhead expense insurance policy can help you protect your business and maintain financial independence throughout your life.    

Conclusion

Disability insurance for self-employed workers can help you protect your family and keep your business afloat in the event of disability. It replaces part of your pre-disability income to help you offset the negative financial impact of a serious injury or illness. Get in touch with a Dundas Life expert to understand your disability coverage needs and find out the right policy at an affordable price.  

Frequently Asked Questions

What are the costs of disability insurance for self-employed workers?

How much disability insurance will cost you depends on many factors, such as your income, waiting period, benefits period, and the definition of disability. Disability insurance premiums also vary based on the applicant’s age, health, gender, and smoking status.  

Disability insurance plans typically define total disability as own-occupation or any-occupation. Because the own-occupation defines disability more broadly, these policies cost more. You will also pay a higher premium rate if you opt for a shorter waiting period, for example 30 days instead of 120 days, or a longer payment period, for example 10 years instead of two years.  

What is the difference between short-term and long-term disability insurance?

Short-term disability insurance covers you for a shorter benefit period — a few weeks or months — following an injury or illness that keeps you out of work. These policies have either no waiting period or a short waiting period, up to 1 or 2 weeks. Long-term disability insurance differs from short term disability insurance as it provides income replacement if a disability prevents you from working for an extended period of time. These policies have a longer waiting period, usually 30 to 120 days, but it can be as long as two years. The benefit period is also much longer, with some policies paying benefits up to age 65.  

Why self-employed workers should consider long-term disability insurance

For self-employed workers disability insurance is a must-have. Since the responsibility is not on an employer, it protects your income and your business if you are unable to work. Without it, the financial impact of an unexpected illness or injury can sink your business.