Technology has made it possible for increasing numbers of people to work from home as contract workers and freelancers. For these self-employed professionals -- who often operate without the safety net of company-sponsored health benefits -- disability insurance is a necessity.
Disability insurance replaces a portion of the insured person's income if he or she becomes too sick to work for an extended period of time. It can be used for bills, mortgage payments and medical expenses, extending a lifeline to those who are no longer employable.
Unfortunately, in many cases, self-employed professionals have difficulty obtaining this kind of insurance, as it's difficult for insurance companies to define the self-employed person's role within the work setting, financial adviser Patrick Barkwell says. In other words, there's no easy way for the insurer to verify exactly what you do and what it physically requires.
"It is difficult to answer the questions of 'How disabled are you?' and 'What percentage of your typical daily functions are you unable to complete?'" Barkwell says.
In addition, most insurers require two years of paperwork to analyze a person's business, Barkwell says. Most self-employed professionals who are starting out don't have the documents to back up their applications. While some insurance companies will award disability insurance to professionals with less than two years of paperwork, "you get much less for a very similar price, such as benefits being payable for five years versus to age 65," Barkwell says.
The earnings information "is where many independent contractors might have a problem," says Ori Pagovich, managing partner at Gotham Financial Services in New York. Insurers will generally average two years of recent earnings to determine how much coverage applicants are eligible for. The problem is that many independent contractors have inconsistent earning patterns.
"If you had a bad year in the past two years, that will lower the amount of coverage you would otherwise be eligible for," Pagovich says.
Why do you need disability coverage?
Self-employed workers usually don't get paid if they aren't working for their clients. In the event of an illness or injury, they may be unable to work at all. That's when a disability insurance policy will help, as it will pay monthly benefits until the insured is able to work again -- or in some cases, until he or she reaches retirement age.
According to Kevin Krueger, president of Capstone Insurors Inc. in Missouri, statistics show that before age 65, one out of three people will experience a medical event that prevents him or her from being able to work.
What you need to apply
Applications for disability coverage are reviewed based on occupation and income. Krueger says that self-employed professionals must be able to provide documentation that verifies their income. Tax returns from previous years are good sources. Barkwell says client contracts and a list of recurring overhead expenses also are helpful.
Along with proof of earnings statements, you'll need to provide medical information. "But that determines if you can get coverage as opposed to how much," Pagovich says.
What to look for in a carrier
If you're self-employed and shopping for disability insurance, your choices might be slim. Over the past few years, the number of carriers that offer disability insurance has shrunk. "However, there are still almost a dozen carriers that offer a wide range of products that cater to different industries and jobs," Pagovich says.
Before choosing a policy, pay attention to its definition of disability and make sure you understand it.
"Not all definitions are created equal," says Pagovich, adding that the carrier should have strong financial ratings, a long history in the disability market and a good claims-paying history.
Also, consider how premiums will be paid and how potential claims would be paid. Robert Loss, owner of theNew Jersey-based Amwell Agency, recommends making sure your premiums will be paid on an after-tax basis so that if you file a claim, the benefits will be tax-free under current federal law. Always consult your tax adviser to verify the tax status of benefits.
Typically, expect disability insurance premiums to cost 3 percent to 5 percent of your gross salary, Barkwell says. Many insurers offer discounts for paying premiums annually rather than monthly or quarterly.