The best long-term disability insurance advice for the self-employed

Self-employed workers usually don't have the luxury to miss work. If you get disabled and can't earn an income, disability insurance can help pay the bills.

Zack Sigel


Zack Sigel

Zack Sigel

Managing Editor

Zack Sigel is a managing editor at Policygenius who oversees our mortgages, taxes, loans, banking, and investing verticals.

Published June 26, 2018|4 min read

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Self-employed workers don’t have the same luxuries as salaried employees when it comes to sick days and disability leave. Usually, if you’re not working, you’re not getting paid.

But long-term disability insurance for self-employed workers is often overlooked because workers don’t understand how it will benefit them. Long-term disability insurance (LTDI) provides income protection, bringing in money when you can’t work so that you’re able to continue to pay bills and keep your business out of danger.

But that’s just the beginning. Read on to learn why every self-employed or freelance worker should be investing in themselves with long-term disability insurance.

Applying for long-term disability insurance isn’t complicated

Your long-term disability coverage is largely determined by your income. How much coverage you need – how much income you’re replacing – plays a big role in your policy and what you’ll pay for it each month. That means figuring out how much you make. For a self-employed worker, that can be a little more involved than for a salaried employee with a regular paycheck.

Then you need to figure out your monthly expenses. You’ll need enough disability insurance coverage to keep paying the bills, such as a mortgage payment or rent, credit card statements, and medical costs.

Long-term disability insurance is important. Even though self-employed workers may have to do a little more legwork initially to get a policy in place, independent agents or brokers can help you figure out your coverage needs and what policy is best for you.

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Disability insurance is meant to replace your income when you become disabled.

Am I eligible for long-term disability insurance?

Beyond meeting basic health requirements – a pre-existing condition may make you ineligible for coverage from some insurers – long-term disability insurance companies require you to prove that you’ve been earning income as a self-employed or freelance person for two years. That means showing two years of tax returns from your business.

Depending on the type of business you run, you may have to show the respective tax document. For example, an S corporation would have to show its Form 1120S or Schedule K1.

A signed contract showing your earnings could also help demonstrate your income.

If you’re still at your full-time job, but you’re planning to make the jump to self-employment or freelancing, purchase your disability insurance policy now. As long as you can afford the premiums, a non-cancelable, guaranteed-renewable long-term disability policy will continue to cover you after you’ve made the transition. That means the disability insurance company can’t cancel the policy or change the terms (including your monthly premium) as long as you pay for it.

How does long-term disability insurance protect my income?

When you’re self-employed, if you can’t work you can’t make money. Maybe you’re a freelancer who is relying on contract work, or maybe you’re a small business owner who is one of only two or three people running the company.

Either way, building the same safety net afforded to salaried employees starts with long-term disability insurance. It protects your own income, and can protect your business, too. It’s important to have, and you should make sure it’s affordable.

How can you do that? By looking at the elimination period and the benefit period.

The elimination period, or the waiting period, of an LTDI policy is how long a policyholder has to wait after becoming disabled before they’ll begin receiving benefits. This is usually somewhere between a month and a year, with most people opting for 90 days. Choosing a longer elimination period – that is, having to wait longer until you begin to receive benefits – usually results in lower premiums.

The benefit period is how long you’ll receive benefits. The longer the benefit period, the more expensive the policy. The benefit period can last until retirement, but the average disability lasts for three years, meaning that a five-year benefit period will cover most people and help make protection affordable.

What if I get disabled but can keep working at another job?

Make sure you get an own-occupation disability insurance policy. That means the definition of disability – what the insurance company considers being disabled enough to receive benefits – only requires you to be too disabled to continue working at your current job.

For example, if you become disabled as a freelance swordsmith, but you can still manage to work at a lower-paid, less physically demanding paralegal job, under an own-occupation LTDI policy, you’d be eligible to receive disability benefits because your occupation is swordsmith. But if you had an any-occupation policy, you wouldn’t be able to claim benefits if you can still work the paralegal job.

Short-term disability insurance can also be helpful, but it’s often unavailable for many self-employed workers. It’s usually more economical to have a long-term disability policy for bigger liability scenarios and pair it with an emergency fund to cover your short-term needs.

Partial disability benefits are crucial

Your disability coverage pays out when you’re so disabled that you can’t work and earn your regular income. But if you’re only able to work part time, your disability insurance policy would help cover some of the missing income from the hours you’re unable to work.

This is called a residual disability or partial disability benefit. Such a provision in your LTDI policy can protect you while you’re rebuilding your business after a disability. For example, if a cancer patient isn’t able to work five days a week during their chemotherapy treatments, they’ll be able to ease back into work and build momentum while still having a safety net in place before they’re back working full time.