Understanding Self-Employed Disability Insurance

September 11, 2019

As a self-employed worker, you carry a lot of the responsibilities that a person that works for someone else doesn’t have to shoulder. This includes disability pay. Self-employed workers don’t have the luxury of disability benefits should they become unable to work.

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That’s why disability insurance, whether short-term or long-term is an important decision in your life – keep reading to learn how it works to see if you should consider it.

Short-Term Disability Insurance

As the name suggests, short-term disability insurance is for temporary leaves from your employment. Most policies provide coverage for two to five years on a short-term policy. The exact term varies by policy.

You can purchase this type of policy for things you know that will come up in your life such as having a baby or a surgery. However, the closer you purchase the policy to when you need it, the more your premium will cost. Insurance companies require a ‘waiting period’, which is the time that you cannot make a claim on the insurance. Typically, the longer the waiting period, the less the premium will cost you. I

Long-Term Disability Insurance

The more common type of disability insurance is long-term disability insurance. Self-employed workers buy this policy to protect them in the event that they become disabled. It’s similar to life insurance; you purchase it ‘just in case.’ If you don’t have to use it, consider it a positive thing, but if something happens, you have the financial protection that you need.

We recommend that you apply for long-term disability insurance as early as possible to keep your premiums low. Most insurance companies require that you are self-employed for at least two years and you must be able to prove your annual income.

Beware that you will have a waiting period that could affect your premiums. For example, one policy may instill a waiting period of one month while another may instill a period of 3 months. You should consider how long you could go without financial protection before choosing a policy. The policy with a one-month period will have a higher premium than the policy with a three-month waiting period, though.

Next, you must consider the benefit period. How long do you need coverage? The longer you request coverage, the higher the premium becomes. Some people request coverage until retirement, when their retirement benefits would kick in, while others make it a more temporary coverage. You need to choose what you are comfortable with, though.

Coverage Amounts

You won’t find a long-term disability insurance policy that will cover 100% of your income. Instead, it’s more common to find insurance companies that offer coverage between 50% and 60% of your income. This will vary by company, though, so make sure you shop around to find the policy that best suits your needs.

Because you can’t get 100% coverage, it’s important for you to have other savings vehicles set up should you become disabled. Could you live on 50% of your income? Many people couldn’t, so setting up other investments that can grow with time will help you have the financial security that you need.

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Using Your Disability Insurance

Your disability insurance will specify the conditions required for you to make a claim on it. The insurance will be tied into your current occupation. If you become unable to operate your business as usual due to a covered disability, you can make a claim and receive payments.

You may, however, be able to work another ‘lesser’ job that doesn’t require the same skills that your business required. While this can be a slippery slope, talk it over with your insurance agent. Knowing that you may be able to earn extra income doing a job that doesn’t utilize the same skills that your business required and that you are now too disabled to do gives you peace of mind when choosing the right insurance policy.

Your insurance agent can help you decide what’s right for your disability insurance needs. Each company has different requirements including the amount of time you must be self-employed, the amount of coverage they will provide, the required waiting period, and the premiums. Shop around to find the policy that suits your needs the most when buying disability insurance for the self-employed.

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