How To Navigate Self-Employed Disability Insurance

When you are self-employed, it’s no secret you are personally on the hook for benefits like health insurance or saving for retirement, but many of us ignore the need for disability insurance.

Feeling jaded by the insurance industry we may say, “why bother?”

The truth is, you are more likely to become disabled than you think. 

The Social Security Administration (SSA) says 1 in 4 of today's 20-year-olds will become disabled before they retire.

Even worse, the Insurance Information Institute claims forty-three percent of everyone above 40 will experience a long-term disability (more than 90 days) by age 65.

Still not convinced?

The Council for Disability Awareness (CDA)—a nonprofit dedicated to educating working Americans about the frequency and financial impact of disability—actually has a calculator to help determine your personal probability.

And accidents aren't usually the reason.

The most common causes of disability are:

  • Musculoskeletal disorders like back pain, arthritis, and spine or joint disorders
  • Illnesses like cancer, heart attack or diabetes
  • Lifestyle choices and obesity

There's a chart with common causes and terminology here.

For self-employed people, the inability to work can be especially devastating.

We don't have employer-covered sick days, and many of us already wrestle with bouts of uneven income. That's why disability insurance—as complicated as it may be—can be such a powerful tool.

Short-Term vs. Long-Term Disability Insurance

Before we dive into the specifics, it's important to understand the differences between the two types of disability insurance—short-term and long-term.

  • Short-term disability insurance offers coverage for up to two years.
  • Long-term disability insurance will cover you until retirement (usually 65), until you die, or a period longer than two years.

If you are buying an individual policy for yourself, the premium won't be deductible and the benefit is not taxable. However, this will be opposite if the policy is an employee benefit for your business.

How to Evaluate Your Disability Insurance Needs

You should answer these questions before you begin the process:

  1. What is your current monthly income?
  2. What are your total monthly expenses?
  3. How much disability insurance do you already have?
  4. Do you have other sources of income (like your partner)?
  5. How much do you have in your emergency fund?  
  6. Do you have access to other disability insurance options (like social security, a group policy, etc.)?

What To Look For in Disability Insurance Policies

1. How is disability defined? 

How your policy defines disability is the most important thing to watch for.

You will likely see one of these terms on your policy:

  • Own occupation (own occ) offers coverage of your current occupation, and you will still be covered if you can work other types of jobs. This is the best coverage you can purchase, and will be the most expensive.
  • Modified own occupation is similar to the definition of own occupation. The difference is you can't be working and claim these benefits.
  • Any occupation (any occ) covers you only if you can't work any type of job. It's difficult to qualify for these benefits, and this policy is the least expensive.
  • Modified any occupation provides coverage for an occupation you are reasonably qualified for based on your education and experience.

It's also possible for the definition to change at a certain point. This is called a split definition.

Lastly, it's important to know Social Security disability is more difficult to qualify for than any of these policies. To receive these benefits, you must suffer an illness or injury that prevents you from working any type of job.

To qualify your disability needs to last at least five months and be expected to last another 12.

2. How long until you start receiving the benefit?

This is usually referred to as the elimination or waiting period.

You will have to wait until your elimination period is over before you start being paid. The most common period is 90 days, but you will also see 30, 60, 180, or even 360 days.

Also, these payments are usually made monthly, so a 90-day elimination period doesn't necessarily mean you will receive a check on day 90. Many times, the payment won't be until the end of the following month.

Regardless of which option you choose, you will need to cover expenses on your own for the elimination period + 30 additional days.

3. How long will the payout last?

This is referred to as the benefit period.

Most companies will cover you until age 65, but it's possible to buy a shorter period. The longer you are covered for, the more expensive your premiums will be.

4. How much will you receive?

Your benefit amount is usually only 50-60% of your gross monthly income, but it's possible to pay extra for a cost of living adjustment rider. This rider will increase your benefit every year by the Consumer Price Index.

It's also possible to integrate how much you would receive through Social Security disability with a social insurance substitute (SIS) benefit rider.

5. Can you increase your benefit in the future?

You can add a future increase option rider for additional premiums. This allows you to increase your benefit if you earn more in the future, even if your health changes. This will guarantee you can be insured for a certain number of years (usually until age 55).

6. Can the insurance company cancel the policy?

You should ask whether or not your policy can be renewed. For an additional expense, these three provisions may be added:

  • Non-cancelable (non can) policies provide the most security. This guarantees your renewal for a specific period of time without higher premiums.
  • Guaranteed renewable means you won't be dropped from your policy, but the insurance company can increase premiums for a specific group of people. You can renew for a period of time (usually until 65) regardless of changes in your health.
  • Conditionally renewable policies won't be cancelled during the policy term, but certain circumstances may allow the company not to renew.

7. Is it possible to receive a partial benefit?

There are a couple of riders that can be added for, you guessed it, an additional cost:

  • Residual disability riders will cover you if you return to a lower paying job. This will pay the difference between your previous and new incomes for a designated period of time.
  • Partial disability riders covers you if you can still perform some of the important parts of your job, but not all. This rider may help you earn a partial benefit.

8. Is anything not covered?

It's possible for insurance companies to offer you a modified offer of coverage. This policy may include an exclusion rider with pre-existing conditions or risky activities. But it may be possible to petition the company to remove a pre-existing condition rider after a certain period of time.

9. Is it possible to receive coverage through a partner?

Many employers do offer group disability plans. In many cases, these plans don't require underwriting. However, these plans may be capped or cancellable. Also, you may lose access to the plan if your partner changes jobs.

Where to Shop for Disability Insurance

There are a number of factors that will contribute to the cost of your premiums. These may include your occupation, age, gender, extent of coverage, and the elimination period.

That's why an independent insurance agent or financial planner may be helpful when comparing different disability insurance plans. Ask your network for recommendations.

It also may be worthwhile to explore group plans through professional organizations you may be a part of.

Before deciding on a provider, you should double-check their rating through companies like Standard & Poor's, Fitch Ratings, A.M. Best, or Moody's.

Readers: Do you have disability insurance?  

Related Post


Discussions — One Response

  • Chonce August 28, 2017 on 7:14 am

    I’m going to be honest, I never really thought about getting disability insurance while self-employed. However, the stats are CRAZY and now I’m looking into it. Thanks for sharing!


This site uses Akismet to reduce spam. Learn how your comment data is processed.