Navigating Disability Insurance for Freelancers

Written by Liz Alton on March 6, 2017

Disability insurance for freelancers is a hot topic in today’s contract workforce. According to the Freelancers Union, there are nearly 55 million freelancers and independent contractors in the U.S. Disability insurance may not be the top benefit that comes to mind, but for some freelancers, it’s a critical part of their safety net. I learned that years ago, when a weird constellation of symptoms sent me to the doctor time and again.

After multiple visits, I was diagnosed with a serious autoimmune disease that can make it difficult to work. While it’s never significantly interrupted my career, the situation caused me to ask hard questions about assuring my future in the face of serious illness, an accident that might leave me disabled or other scary circumstances. Here’s a closer look at what you need to know about disability insurance for freelancers.

Understanding the Role of Disability Insurance

When you think about your long-term security, disability insurance might not be on your radar. But protecting your income is directly tied to long-term planning. If you become injured or ill and it leaves you disabled and unable to pay your bills, then expenses like your mortgage, debt payments and basic living requirements may be impossible to meet. This can leave you in dire straits, raiding retirement accounts, depleting savings and worse, just to get by.

With disability insurance, a percentage of your income is paid out in monthly benefits. Many companies provide group plans to their workers. Typically, these plans cover up to 60 percent of your income, with a monthly maximum. Benefits where the employer paid the premium are taxable; benefits from a plan you paid for yourself are not taxable. For freelancers, there’s an accessible market that allows individuals to purchase their own plans, whether it’s covering a gap in an existing policy or filling a hole created when you started your own business and left corporate benefits behind.

Short-Term Versus Long-Term Disability Insurance

When choosing a policy, first consider the difference between short-term and long-term disability policies. A short-term policy typically covers a temporary condition, such as a short-term illness or recovering from surgery. Some policies might also cover a number of weeks in connection with maternity leave, for example.

Long-term disability policies kick in when it becomes clear an individual can’t work over the long term. Whether you’re battling an illness that takes you out of the workforce for a few years or you’re permanently disabled until retirement, these plans can keep your finances and lifestyle on track.

Factors to Consider When Choosing Disability Insurance

As a freelancer, there are a number of different strategies to consider when shopping for disability insurance. There are two critical factors: your income and your health. Be prepared for a full (and sometimes invasive) check into your health background. Everything from routine chiropractic visits to therapy appointments will be evaluated as part of the underwriting process. More serious conditions may receive scrutiny, and companies may suggest policies excluding that condition — or raise the premium to provide coverage for issues related to it.

Disability insurance is also about protecting your income, as it’s specific to your situation. An individual making $100,000 per year will receive a different level of benefit from someone making $40,000 per year. As a freelancer, be prepared to show a few years’ tax returns to establish a solid income history. A baseline income determines your monthly benefit, and in some cases, freelancers with variable incomes will need to work with underwriters to determine what the insurance company considers their standard benefit.

Evaluating an Individual Policy

You should ask the following questions, as well:

  • What’s the waiting period? Plans often have at least a 30-day waiting period or longer before benefits kick in. A longer waiting period means lower premiums, but you must have enough cash on hand to cover expenses.
  • What percentage of your income will it cover? Look at what percentage of your income a policy will cover and consider whether that will provide you with enough cash flow to live comfortably. It’s impossible to get coverage to 100 percent of your income, as you need incentive to work. Determine whether you could live on 50 percent of your income or if you need 80 percent, for example. The more coverage, the higher the plan.
  • What’s the definition of disability? In certain cases, the insurance company has a unique definition of disability. For instance, they may interpret it as never being able to work again in your own — or any — field. Are you allowed to work part-time, and will benefits adjust to your income levels? Understand the plan specifics, so you can choose a plan best fit for your needs.

Disability insurance for freelancers protects one of your most important assets: income. Simply qualifying as a freelancer can prove challenging as you document your income and go through the underwriting process. However, knowing you’ll generate cash flow even if the worst happens and you’re unable to work can put your mind at ease and help you smoothly navigate when challenging circumstances occur.

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