Self-employed? How to find disability insurance

August 16, 2011

If you’re self-employed and work out of your home, it’s probably occurred to you that you ought to have long-term disability insurance. If you’ve mentioned this to your insurance agent, they’ve probably told you it’s a good idea and not a problem.

But, chances are when you looked into it, it has, indeed, been a problem.

Policies seem expensive and unlikely to replace the income you actually need — if you can get coverage at all.

Here is what you need to know to get the coverage you need at the best price possible.

How much insurance do you need?
The point of long-term disability insurance is to replace your income if you’re disabled and unable to work for an extended period of time — maybe a few years or maybe until you qualify for retirement benefits at age 65.

The tricky part is that policies for self-employed workers rarely replace gross revenue, the total amount you bring in. More likely, it will replace the portion of your income left after you take out your business costs, which is the amount the insurance company believes you live on, says Neil Palache, a financial coach in Westlake Village, California, who worked as an insurance broker for many years. To get an idea of what this would be, look at the portion of your income you pay income taxes on.

If there are expenses related to your business that you’ll want to continue covering while you’re disabled — say a license you want to keep current if you hope to get back to your profession eventually— Palache suggests adding a Business Operating Expenses policy to your LTD policy.

A BOE policy is what it sounds like, but Palache cautions, “Don’t expect this policy to cover everything you write off as a business expense on your taxes.” You might have home-office write-offs for a portion of your mortgage or utilities, but these are expenses you would have anyway, he says. So your LTD Policy would have to cover them. The BOE policy covers expenses that are exclusive to your business, like a separate phone line.

How much does it cost?
Quite a bit. Palache estimates that an LTD policy paying $6,000 or so a month, about what a person grossing $100,000 a year would need. “You can easily spend $500 a month,” he says.

Nancy Behrens, a vice president for operations at State Farm, in Bloomington, Illinois, says there are ways to lower the cost, “But if you pay a smaller premium it’s always going to mean less coverage.”

You can buy coverage for a period of years, maybe five or ten, instead of to age 65. You can also extend the period of time you need to wait before the benefit kicks in to six or nine months instead of the typical two or three. You can also settle for a smaller payout.

She estimates that a 40-year-old man in good health who grosses $100,000 could pay $50 a month for a policy that pays out $3,300 a month for five years after a six-month waiting period. But this totals only $39,600 a year, which is probably not enough to replace his net income.

The one way to save money without skimping is to buy into a group policy. Says Palache, “Some professional organizations offer this coverage to their members and it’s a good way to buy it if you can.”

How do you qualify?
A LTD policy replaces your income, so you’ll need to demonstrate that, probably with several years worth of tax returns. An insurance agent might also want to visit your home to see what your work set-up looks like.

“They want to know that this is really how you make a living, that it’s not something you do on-and-off or part-time,” Palache says. It helps to be in a business that requires some licensing, like accounting, he says. Having a very official set-up, ideally with a separate business entrance, also improves your chances of getting coverage.

Independent consultants, freelance writers and others who don’t need a license and can have highly variable income are likely to have the hardest time qualifying, he says. Contracts to show ongoing work, backed up by tax returns showing a steady income stream will improve your chances.

What are the details to pay attention to?
“You have to pay attention to the details of your policy to the extent that you can,” Palache says. The first thing to ask is whether the policy specifically replaces the income from your current profession or from any work at all. “If you are a surgeon and something happens to your hands you probably can’t be a surgeon anymore,”  Behrens says. “But you might practice some other kind of medicine or turn to teaching.”

Those alternatives are likely to pay less than your surgeon’s salary. A policy written to cover that specific career will probably make up the difference, but a policy written to replace any salary will stop paying if you find  other work.

These policies typically have a waiting period of at least 60 to 90 days before they begin paying. Palache says to ask whether or not these days have to be consecutive. If after a month you try to work for a week and find you can’t, does the waiting period start over or just get extended by a week?

“I’ve seen policies written in such a way that there’s no way the person would ever get paid,” Palache says. When it comes to an LTD policy “If it seems too inexpensive, definitely wonder why.”


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

Ridiculous. It’s like having no disability insurance at all. May as well pay for nothing at all.

Posted by NewsLady | Report as abusive

Yes. And the most serious question you ought to ask yourself is why they would ever pay you anything. And if they possibly could pay a claim. Insurance companies are no more reliable than banks and they themselves are not insured. What is more, insurance companies can be hijacked by crooks just as banks and investment funds can.

You are paying to get taken care of when you are weak and unlikely to be a threat to anyone. Look around you. What is happening to the weak and the needy? Would you voluntarily pay to be treated that way?

Posted by txgadfly | Report as abusive