Best Disability Insurance for Self-Employed Individuals

A comprehensive guide to disability insurance for self-employed individuals, helping you protect your income and financial well-being.

Key Terms

  • A long-term disability insurance is integral for self-employed individuals to maintain their financial well-being.
  • Purchasing a disability policy before you quit your full-time job can make it easier to qualify and give you better rates.
  • While you may be able to receive Social Security Disability Insurance, it’s extremely difficult to qualify, and coverage may be insufficient for high-income earners.

Disability insurance is an important tool that can help you maintain your income and support your family if you are unable to work due to a disability. As a self-employed individual, you are responsible for your own financial well-being and that includes protecting yourself against the possibility of an injury or illness that could prevent you from working. 

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Why do self-employed individuals need disability insurance?

As a self-employed individual, you may not have access to the same types of employer-provided benefits that many people have, including disability insurance. This means that you are responsible for protecting yourself and your family financially in the event of a disability.

When you have disability insurance, you’ll receive benefits to replace your take-home pay when you’re unable to work because of a disability, which isn’t limited to a period of injury but critical and chronic illnesses, too. You can use disability insurance benefits to maintain your income and cover your living expenses — including payments towards your mortgage, debts, and even retirement or college savings — while you are unable to work. Without disability insurance, self-employed people may have to rely on their personal savings or other financial resources to make ends meet, which could end up depleting them if you’re unable to work for an extended period of time. Fortunately, with a long-term disability insurance policy, you can receive benefit payments until you retire.

How can self-employed workers get disability insurance?

There are three types of disability insurance that self-employed individuals can get based on their needs as they each have distinct purposes.

Short-term disability insurance gives you coverage for a short period of time, usually up to a few months. It’s designed to help you bridge the gap while you are unable to work due to a temporary disability, such as a broken bone or surgery. Because of the limited coverage it provides, short-term disability insurance may not be worth the costs — especially for high-income earners who can likely shoulder the burden of a few month’s lost wages on their own. Depending on your state’s laws, and how you’re classified as an employee, independent contractors may be able to receive workers’ compensation, a form of temporary disability insurance that will help you cover medical bills and lost wages — but only if you’re injured on the job.

Long-term disability insurance, on the other hand, can pay you benefits for several years or until you reach retirement age. These policies can help replace your income when you meet the insurance company’s definition of disability, which often includes being unable to work due to chronic illness — not just injury. You can also tailor your policy with different riders, or add-ons. 

Social Security Disability insurance (SSDI) is provided by the government. This disability insurance is free (it’s funded through Social Security taxes, which you pay as part of your self-employment taxes), but notoriously difficult to qualify for, and it comes with lower benefit amounts than private disability insurance. How much you can receive in SSDI benefits depends on how long you’ve been working. Social Security disability is best for individuals who are unable to purchase their own individual long-term policy. 

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Cost of disability insurance for self-employed workers

The cost of disability insurance for self-employed individuals will vary depending on a number of factors, including: 

  • Your age: The cost of disability insurance increases as you get older. 
  • Your occupation: Certain professions are deemed riskier to insure, and disability coverage costs increase accordingly.
  • The amount and type of coverage: The higher your income and coverage needs, the higher your premiums.

On average, the cost of disability insurance for self-employed individuals ranges from 1% to 3% of their annual income. For example, if you have an annual income of $200,000, your disability insurance premiums may cost anywhere from $2,000 to $3,000 per year.

Some other factors that may affect the cost of your policy include the length of the waiting period (the amount of time you must wait before your benefits begin), the benefit period (the length of time you will receive benefits), and any riders or additional coverage you may choose to add to your policy.

Keep in mind that the cost of individual long-term disability insurance is a small price to pay for the financial protection it can provide. You can shop around and compare policies from different companies to find the coverage that meets your needs at a price that fits your budget. Some insurers may offer discounts for self-employed people working in certain occupations, or for purchasing multiple policies, like if purchasing a life insurance policy, or a business overhead insurance policy.

Tips for finding a disability insurance policy

If you are a self-employed individual, it’s important to consider purchasing disability insurance to protect yourself and your family financially in the event of a disability. Here are some tips for finding the right policy:

  1. Determine your coverage needs: Consider your financial obligations and how much income you would need to maintain your standard of living if you were unable to work due to a disability. Take into account loan payments, retirement savings, in addition to housing, utilities, and daily living expenses.
  2. Compare policies: Look at the coverage, exclusions, and premiums of several different policies to find the one that meets your needs and budget.
  3. Consider the waiting period: The waiting period is the amount of time you must wait before your disability insurance benefits begin. A shorter waiting period means getting your monthly payment sooner, but may also have a higher premium.
  4. Have your documents ready: Self-employed individuals should have the appropriate paperwork to show the underwriter how much they earn, whether it’s a Form 1120S or Schedule K1. The underwriter typically looks for two years’ worth of tax returns when you’re an independent contractor, similar to if you were a sole proprietor or small business owner.
  5. Lock-in coverage early: “If you’re currently employed full time, you should buy your disability insurance now before leaving,” according to Pradeep Audho, licensed broker and owner of PKA insurance with over TK years of experience. He suggests buying six months to a year before you quit. It will be easier to qualify, and your disability insurance will stay with you as long as you continue paying premiums (make sure you’re getting a non-cancelable, guaranteed renewable policy).  

Is disability insurance worth it when you’re self-employed?

The short answer is: Yes, disability insurance is worth it for self-employed individuals. While short-term disability insurance may not be worth the cost, buying long-term disability insurance can provide coverage for self-employed individuals until they retire and pay higher benefits than what you’d receive through SSDI.

Having a disability policy means you don’t have to worry about dipping into your savings or retirement funds to cover your daily living expenses, not to mention any medical bills that arise from your illness or injury. The cost is small compared to the potential benefit, including the peace of mind knowing that you and your family are financially protected in the event of a disability.

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Joshua Holt is a licensed insurance agent (License #2785989) and founder of Biglaw Investor and Sidebar Insurance LLC, an insurance agency created by lawyers, for lawyers. His insurance expertise lies in the areas of life and disability insurance, particularly covering lawyers, doctors and other high-income professionals. Prior to Biglaw Investor, Josh practiced private equity mergers & acquisition law for one of the largest law firms in the country.

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