Disability insurance for individuals who are self-employed

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Quick answer: You need disability insurance more than life insurance. Those who do not have disability insurance through a job, including the self-employed, can find individual coverage through reputable companies for an affordable price. Breeze disability insurance plans start at $9/month for people aged 18 to 60 years old, with monthly benefits ranging from $500 to $20,000. Get a free long-term disability insurance quote in minutes from Breeze >>

Disability insurance is part of your overall financial health. Also make sure you are:

  1. Paying off debt.
  2. Have a $1,000+ emergency fund, and a basic investing strategy.
  3. Own life insurance. Get a quick quote from Bestow, which provides A+ rated term life insurance starting at $8/month for $50,000 policies, and guaranteed no medical or lab exam. Get a life insurance quote from Bestow in 5 minutes >>
  4. Have home or renters insurance.

Disability insurance is a common workplace benefit, often partially or completely paid for by the employer. But disability insurance for the self-employed is a different matter, because there’s no employer to arrange it.

No one likes to think about becoming disabled. Yet according to the Social Security Administration, a little more than 25% of today’s 20-year-old workers will become disabled before retirement.

Workers’ Compensation only covers injuries and illnesses that are directly caused by the workplace. Social Security Disability Insurance is another benefit source, but only about 1 in 3 applicants qualify, the average processing time is more than 18 months, and the average SSDI benefit is $1,197 per month.

If you’re a freelancer or entrepreneur, or thinking about becoming one, it’s vital to protect yourself and your business. Here’s what you need to know about disability insurance for the self-employed.

What is disability insurance? 

Disability insurance is just what it sounds like: a policy meant to replace a portion of your income if illness or injury leaves you unable to work. Each insurance company has its own limits, but typically disability insurance covers up to 60% of your pre-tax salary.

How does disability insurance work for individuals who are self-employed?

If illness or injury strikes, you can file a claim for disability benefits with supporting documents from your doctor. After the “elimination” (waiting) period ends, your monthly payments begin.

Benefits are paid for the number of years specified in the policy; in some cases, that could mean until you reach full retirement age. Some policies also pay for related expenses, such as home modification (e.g., a wheelchair ramp) or vocational rehabilitation.  

When you’re cleared to go back to work, you notify the insurance company to end the payments. Some policies provide partial benefits if you go back to work part-time, or if you can work only in a different kind of job.

What does disability insurance cover?

The insurance covers illness, injury and other conditions (such as pregnancy) that keep you out of the workforce. According to data collected by the nonprofit Council for Disability Awareness, the top five reasons for long-term disability claims are:

  1. Musculoskeletal disorders (29%)
  2. Cancer (15%)
  3. Pregnancy (9.4%)
  4. Mental health issues, such as depression and anxiety (9.1%)
  5. Injuries such as sprains, fractures, and strains of muscles and ligaments (9%)

What is not covered by disability insurance?

Typically, any injury or illness originating in these situations is not covered by disability insurance:

  • Fighting in a war.
  • While committing a crime, participating in a riot, or while in jail.
  • Self-inflicted or intentional injury to yourself.

Is disability insurance based on income?

Yes, you will need to prove your most recent income to qualify for any sum of disability insurance.

The monthly benefit payout amount should be about 60% of your take-home pay. You may be able to purchase more disability insurance to cover increases in the cost of living.

How much disability insurance do I need as a self-employed individual?

As noted, a typical policy covers as much as 60% of your current income, up to a cap set by the company. Before choosing your benefit level it’s important to add up all essential expenses. (If you’ve already got a monthly budget plan in place, you’ll know exactly how much it costs to support your lifestyle.)

The earlier you buy the policy, the less it will cost. That’s because the older we get, the more likely we are to become sick or injured. For example, suppose in your late 20s you’re treated for a repetitive strain injury. When you apply for disability insurance at 35, RSI might be excluded from coverage.

Note: When you buy your own disability insurance policy, any benefits paid out are not taxed. However, benefits from an employer-paid policy are subject to income tax.

Disability insurance for individuals

Short-term disability insurance, which is generally available through an employer, provides benefits for up to one year after a short “elimination” (waiting) period.

Long-term disability insurance may also be offered through an employer, but can easily be purchased by individuals. It has a longer elimination period (generally 30 to 90 days), but continues to pay out until the disability ends or the insured reaches retirement age.

The benefits will depend on the kind of insurance you buy. For example, some policies will pay if you can’t work in your current occupation, while others will pay only if you can’t work in any job you’re qualified to do. It’s essential to compare apples to apples when researching the cost of disability insurance.

Still have a day job but looking at self-employment? Consider buying long-term disability insurance now, so you can take it with you when you segue into solopreneur-ing. Specify a non-cancelable, guaranteed-renewable policy. That way, your coverage will continue as long as you make your payments.

If you’re already self-employed, look at getting disability insurance right away. As noted, you’ll likely get the lowest premiums when you’re young. For example, Breeze offers policies beginning at just $9 per month, and you can apply online in minutes.

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How much does disability insurance cost for individuals who are self-employed?

Generally speaking, a policy will run between 1% to 3% of your salary.

If you are self employed, disability coverage is based on your income as reported on the past two years of your tax returns. For example, for a sole proprietor, use your 1040 and Schedule C. For an S Corp, your 1040, W2 and Schedule E are used.

If you have been self-employed for less than two years, the disability insurer will ask for recent W2s or other documents.

Unlike many health insurance premiums, disability insurance premiums are not tax-deductible. However, any benefits paid through an individual disability insurance plan are tax-free.

How do I get disability insurance?

Disability insurance for the self-employed is available through traditional insurance companies, independent brokers, unions and “insurtech” companies like Breeze.

Look for a company with a superior financial rating. Agencies like Moody’s and A.M. Best rate insurance companies; just like in school, a grade with an “A” in it indicates the better-performing companies.

In most cases you’ll need to show two years’ worth of tax paperwork to prove you earn a living as a self-employed person. You’ll also need to provide a family medical history and both personal and professional information.

Some level of medical examination, including blood tests, is generally necessary. (But not always; Breeze rarely requires an exam.) You’ll probably need to authorize the release of medical records and, in some cases, your driving record and credit report. Breeze only uses social security numbers to verify identity — not qualify you for coverage. 

Google the phrase “disability insurance for the self-employed” and you’ll find traditional insurance companies offering to match you with agents in your city. At that point you’d go through the process noted above.

Breeze Disability Insurance review

Breeze is an insurtech start-up that specializes in long-term disability insurance. Founded in 2019, it is underwritten by Assurity Life Insurance Company, which has been in business for more than 125 years and has an “excellent” rating from A.M. Best.

Currently Breeze is the only insurance company offering a 100% online application process. Thanks to fully automated underwriting, Breeze can provide instant quotes and set you up with a long-term disability insurance policy in as little as 15 minutes from start to finish. You probably won’t even need to take time out from your workday for a doctor’s exam or blood work.

Bonus: If your income is under $4,000 per month, you don’t have to provide any proof of earnings. Those making more than $4,000 monthly have to provide just a pay stub or tax return.

Here are a few of the free features in every Breeze policy:

  • Presumptive disability: In the case of loss of eyesight, hearing, speech or limbs, there’s no elimination period – benefits begin immediately.
  • Partial disability: If you return to work part-time after full disability, you’ll get a monthly benefit for up to six more months.
  • Home modification: This is a benefit for those who have to retrofit your home to accommodate a disability.
  • Survivor benefit: If you die after receiving payments for at least 12 months, Breeze pays a lump sum equal to six times the monthly benefit.

Based on the information you provide, Breeze will give you personalized options (good, better, best) that you can customize. For example, you can add options like a non-cancelable policy or “guaranteed insurability,” which lets you buy more coverage to add to your base policy monthly benefit. 

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Is disability insurance worth it?

Disability insurance for the self-employed is not just worth it – it’s crucial. When self-employed workers can’t bring in money, they can’t get paid. The business you worked so hard to build could be heavily affected – or maybe even collapse – if you are unable to work. Having disability insurance could mean the difference between financial survival and financial disaster.

If you’re in the market for disability insurance for the self-employed, Breeze is the fastest and easiest way to do it. Within a quarter of an hour you can obtain coverage that provides peace of mind and lets you get back to the business of growing your business.

Get a long-term disability insurance quote online in less than 15 minutes with Breeze now >>

Wealthysinglemommy.com founder Emma Johnson is an award-winning business journalist, activist and author. A former Associated Press reporter and MSN Money columnist, Emma has appeared on CNBC, New York Times, Wall Street Journal, NPR, TIME, The Doctors, MONEY, O, The Oprah Magazine. Winner of Parents magazine’s “Best of the Web” and a New York Observer “Most Eligible New Yorker," her #1 bestseller, The Kickass Single Mom (Penguin), was a New York Post Must Read. A popular speaker, Emma presented at the United Nations Summit for Gender Equality. Emma's Top Single Mom Resources.

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