Long-term disability insurance for freelancers 101

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Freelancers can be at a disadvantage in one major situation: insurance. Having insurance as a benefit as a large corporation helps hide the costs of it considerably. Long-term disability insurance is one of the less well-known insurance products you’ll run into, but it’s also one of the most crucial. This article will break down the facts behind long-term disability in the most digestible way possible, while also pointing you to our other resources on this topic.

What does long-term disability insurance do?

Long-term disability insurance provides coverage during long periods where you are unable to work due to an illness or injury. You can think of it like income replacement; when you’re not getting a paycheck due to disability, you’ll get a monthly benefit from your insurance company. This monthly benefit is closely modeled on your actual, real life paycheck – the amount varies depending on the policy, but it can be as high as 60 of your previous monthly paycheck, which corresponds to your actual, post-tax take-home pay.

This amount is calculated a little differently for freelancers, which we’ll talk about below.

What counts as a disability?

A disability is any health condition that stops you from being to work. This include injuries, infections, and complications of pregnancy and childbirth. The average disability claim lasts between 31 and 35 months, though some disabilities last decades.

Why you need long-term disability insurance

One in four twenty-year-olds experiences a disability before they retire, meanwhile 65% of adults have no savings put aside for emergencies. On top of that, social security rarely covers you or doesn't provide enough coverage.

How about this for a statistic: you’re twice as likely to get a disability than you are to die young, but only 28% of Americans have long-term disability insurance compared to about 70% who have life insurance. Meanwhile, medical problems led to 60% of personal bankruptcies, with lost income due to illness cited as the primary cause for 40% of those bankruptcies. For freelancers, long-term disability insurance should be a key part of your financial safety net. As a freelancer, if you can’t work, that’s it. You are your own boss and you provide 100% of your own income, meaning you won’t get much of a support system out of your workplace.

What to know before you start shopping

There are two must-have features you should look for in a long-term disability policy, especially as a freelancers. First up, any policy you buy should be non-cancelable and guaranteed renewable. That means the insurer can’t cancel the policy or change the terms (including your monthly premium) as long as you pay for it. This is especially important if you’re buying the policy while you’re young and healthy – nothing is more satisfying than paying the premium of a 20-year-old when you’re in your fifties. Another perk? If work dries up and you’re making less money, your long-term disability policy will still pay out at the higher income. Fun fact: To insurance companies, non-cancelable means "can’t raise your premiums" and guaranteed renewable means "can’t cancel your policy." You might be thinking to yourself, Hey, that sounds completely backwards.

Another must have? An "own-occupation" rider. This rider is super important when it comes to your insurance company defining whether or not you are truly, totally disabled. On policies without an own occupation rider, your policy might stop paying out once you’ve started working again in any other occupation.

How to get affordable coverage

A long-term disability insurance policy can be surprisingly inexpensive if you buy one when you’re young and healthy. If you’re over the age of 30, prices start to steadily rise, so buy a policy as soon as possible to lock in a smaller rate.You can see just how much a long-term disability policy will cost you by getting a free quote from our long-term disability quoting engine.

Other frequently asked questions

You probably have some more questions — and we've got the answers. Here's everything else you need to know as a freelancer buying long-term disability insurance:

I haven't left my full-time job yet and I already have a long-term disability policy through them! Can I keep it?

Maybe! Check with your HR department to see if the policy is either portable or convertible. They’ll be able to explain the exact details. You’ll still want to get a quote through our long-term disability insurance quoting engine. That way, you can compare your existing policy to one you could buy independently.

I haven't left my full-time job, but I don't have a long-term disability policy yet. Should I wait until I leave my job to get a policy?

No! Most insurance companies will not cover freelancers until they can show two years of income from freelancing. If you’re just about to start freelancing, but haven’t quit your job yet, you should get a "non-cancelable/guaranteed renewable" long-term disability policy before you go.

Oh, no! I just left my job without getting a long-term disability policy. What do I do?

That’s okay! Put a reminder in your calendar to look into getting a long-term disability policy after you have two years of income tax returns as a freelancer (and bookmark this article so we can help you out in the future).

Since my income is variable from month to month, what’s the best way to report my income?

Insurance companies will look at your income tax returns. They won’t try to match your variable income – your benefit amount, should you become disabled, will be a stable, month-to-month payout based on your annual income.

What if I make it to retirement without suffering a disability? Wouldn’t that mean I just spent the last few decades slowly flushing money down the toilet?

Sure, if you see protecting yourself and your family from potential financial ruin as a waste of money. Read more about why we think long-term disability insurance is worth the cost.

What if I stop paying my premium?

Your policy will be canceled.

What about taxes?

Since you’re paying for the policy with post-tax money, you’ll get a tax-free benefit. You can then use that tax-free money on anything you want. However, if you use it to fund a retirement account or buy stocks, there may be taxes on those transactions.

I have so many more questions about long-term disability insurance in general!

Lucky you! We have a ton of great resources to help you out in our long-term disability insurance guide.

Image: Nathan Rupert