Getting disability insurance as a small-business owner or independent contractor is slightly more complicated than getting it as an employee, but it could be a lifeline.
Published July 24, 2018|4 min read
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Your first thought when building your small business should be making sure your finances are in order. That means not only developing a product or service and marketing it in a way that generates profit, but also minimizing risk and shielding your business from unexpected expenditures. You probably already have health insurance and life insurance for yourself and maybe for your employees, but you may be missing a crucial type of insurance: long-term disability insurance.
Long-term disability insurance, or LTDI, is designed to replace your income if you become disabled and can’t work. The insurance company pays you a benefit each month roughly equal to your income after taxes, which the carrier pays until the benefits period ends or you become well enough to work again.
Getting disability insurance as a small-business owner or independent contractor is slightly more complicated than getting it as an employee. However, it could be a lifeline while you’re recovering from an illness.
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When you have disability insurance, if you become so disabled that you can’t work, the insurance company will pay you benefits to help sustain you while you recover. These benefits replace between 60% and 80% of your income, or roughly your take-home pay.
When you purchase your LTDI policy, you agree to pay a monthly or annual premium to keep the policy in force. Your premiums are partly determined by the size of your benefits and the amount the benefits are supposed to last, which is called the benefits period. Under LTDI, benefits periods can last as little as five years or until you turn 67. Short-term disability insurance, a related product usually only offered by employers as part of an employee benefits package, has a much shorter benefits period.)
Long-term disability is the best type of disability insurance for most people.
Let our experts help you find the perfect income protection policy.
Long-term disability insurance usually costs between 1% and 3% of your income. As a small-business owner, your premiums shouldn’t be so high that they’re unaffordable in your profit margins. Policygenius can help you choose a plan that provides you with the coverage you need while not putting you in the red.
Depending on your financial circumstances, LTDI might be an important part of your budget and business plan. If you’re not earning an income, you might find it difficult to pay your rent, mortgage, medical bills, or groceries.
You’ll only have to pay taxes on your LTDI benefits if you paid your premiums with your pre-tax dollars, such as with a payroll deduction. If you paid your premiums with after-tax dollars, your long-term disability insurance benefits will be tax-free.
No, long-term disability insurance premiums are not tax-deductible.
Whether you’re a small-business owner, an independent contractor, or simply an employee at somebody else’s business, the process for purchasing a long-term disability insurance policy is roughly the same. You calculate how much money you earn, how much you’ll need to survive if you become disabled, and how much you can afford to spend on premiums.
Then, get quotes and apply. You’ll have to fill out some paperwork, do a phone interview with the insurer, and take a paramedical exam to confirm your health status.
Getting LTDI as a small-business owner or independent contractor is more complicated than getting it as regular wage-earner because you need to show that your business has been profitable for at least two years. For most people, that means showing two years’ worth of tax returns.
The type of tax document you have to show depends on the type of business you run, but your disability insurance carrier should tell you exactly what you need to provide.
If you’re thinking about quitting your job and starting a small business, consider purchasing the disability insurance policy before you quit while you’re still earning an income. That way, you won’t have to wait for two years of profit before you’re eligible for long-term disability coverage. Make sure the policy is non-cancelable, which means that the carrier can’t raise your premiums as long as you keep paying them, and guaranteed-renewable, which prohibits the insurer from altering your coverage.
If you’ve already struck out on your own, but can’t wait the two years for coverage, you’re not out of luck. Here are some scenarios under which you can still get LTDI coverage if you haven’t been in business for two years:
You may still be able to get coverage if your business is in the same industry as your previous employment.
You have signed contracts that prove future income, on which you can base your disability insurance coverage amount instead of tax returns.
You’re starting a business with a high income potential. Under the insurer’s starting practice limits coverage, a minimum amount of coverage may be offered to certain professionals. These are usually doctors, dentists, pharmacists, veterinarians, CPAs, engineers, architects, and attorneys. Students studying to go into one of these professions may also be eligible, including medical students, MBA students, and medical and dental interns and residents. Check with your insurer for coverage limits and eligibility.
If your small business employs people, you’ll want to keep paying them if you become disabled and can’t keep running the business. For that, you’ll need a separate disability insurance product called business overhead expense (BOE) disability insurance, which protects your business’s expenses. Some of the expenses covered by BOE may include:
Utilities and maintenance services
Equipment, including office supplies and depreciation of business assets
Salaries, payroll taxes, employee benefits, workers’ compensation
Property taxes, accounting fees, loan obligations, subscription dues
Business overhead expense insurance is typically short-term coverage, covering about one to two years of expenses. It doesn’t replace your personal LTDI policy, which covers your expenses. You may be able to save money by buying your BOE and LTDI policies from the same company, so check with your insurer about rates.