Disability insurance for the self-employed

One of the benefits of being self-employed is being able to take more control. You may set your own hours, choose your own clients or give yourself the holidays off. But no one can control when a major illness or injury occurs. An unexpected interruption to your income can be challenging, especially if you are the primary provider for your family.

Disability insurance can provide essential income protection during an unexpected illness or injury, helping stabilize your finances when work is interrupted. Let’s discuss how it works for the self-employed, what government-run programs may help and key tax considerations.

Disability insurance is an insurance product that protects your income in the case of a short- or long-term injury or illness. You pay monthly premiums, and if you experience a qualifying event, you will receive a percentage of your monthly income as a benefit for a period of time. It’s a way to have access to some predictable income during a season when you may be physically unable to work.

This is especially important for self-employed individuals because you don’t have the safety net of an employer's benefit package. If you are a solo entrepreneur or run a small business with only a few employees, you may not have a group benefit that supplements your private disability insurance coverage. And if the worst happens, you don't want to have to dip into savings to cover your normal spending.

Understanding what disability income insurance is available in the private market is crucial for protecting your income and maintaining your financial plan if you need to step away from work.

When evaluating disability insurance as a self‑employed person, you’ll typically compare private policies with government‑run programs to understand how each fits into your overall risk‑management strategy. The specifics of these programs can be factored into your overall assessment of risk and need for protection. 

Short-term disability insurance for the self-employed is designed to cover a period of temporary disability, such as broken bones, surgery recovery or giving birth. This type of coverage gives you time to recover from a major illness or injury that typically resolves within weeks or a few months. Speaking with an insurance professional can help you understand coverage exceptions or alternatives.

Long-term disability insurance covers major disabling events that can span many months or even years. This coverage may cost more, but it can cover periods of time when you cannot work due to chronic or long-term health challenges, such as cancer treatment or degenerative diseases. Choosing private long-term disability insurance helps self-employed professionals protect their personal finances and business continuity if a major health event limits their ability to work.

If you accurately report your income from self-employment, pay your Social Security taxes and have worked for the required number of years, you may qualify for Social Security Disability Insurance (SSDI), even if you are self-employed. The application process involves demonstrating a qualifying disability that is expected to last more than a year and showing that the qualifying disability prevents you from working at a substantial level (referred to as Substantial Gainful Activity).

A separate program through the federal government, Supplemental Security Income, may assist you in other contexts if you are a self-employed worker. Think of SSI as a safety net for those with limited resources rather than a disability insurance product. While it is helpful if you experience disability, it has strict income limits and asset limits.

Several states offer disability insurance programs that may provide short‑term income support, and self‑employed individuals need to understand whether participation is mandatory or optional. Self-employed individuals will need to explore the specifics of their state’s mandatory or voluntary programs. At a minimum, you’ll need to figure out how to opt in if your state has one of these programs.

Yes, you can get disability coverage for independent contractors or other self-employed professionals. However, the process requires some work. As a business owner or self-employed professional, you’ll need to evaluate private short-term and long-term policies to determine how much protection you need to sustain your business and life should a disability occur.

Government-run programs offer some assistance, but they aren't available to every self-employed worker. For instance, SSDI requires work credits and eligibility. SSI requires proof of limited resources. And some states don't have state-run disability insurance programs.

Also, as a self-employed individual, you’ll need detailed financial records to obtain coverage. You must show that you have stable, if occasionally variable, income from your business. This is how the insurance provider will establish your benefit amounts and premiums.

Premiums for private disability insurance are influenced by your age, health, benefit amount and the structure of your business, all of which affect how insurers assess your income and risk. These premiums are usually paid with taxed income when you buy them as an individual for yourself. However, if you are self-employed and have employees, your contribution to purchase your employees' disability insurance may be tax-deductible.

Similarly, whether you’ll owe taxes on the benefits from disability insurance will depend on who paid the premiums. Often, if you paid your premiums with taxed income, your benefits will be tax-free. Speaking to an insurance professional or an accountant can help you dig into the exact conditions of your particular contract options and how they’ll impact your tax liability. 

Choosing the right disability insurance contract involves looking at your needs and preferences—and what's available in the market. Follow this process to comprehensively evaluate your options.

Considering major bills that cannot go unpaid can help you decide what percentage of your income you want covered by disability insurance.

Perhaps your self-employment income comes from very specific, high-income skills. "Own occupation" coverage protects you if you can no longer work in your own chosen vocation, even if you could work in another field. Speak with an insurance professional to understand how being self-employed in a specialized occupation could impact the availability of own-occupation coverage and its cost.

Two other major drivers of premium cost are waiting periods (how long you'll wait between the disabling event and when your coverage begins paying a benefit) and benefit duration. As you might expect, short waits and long-lasting benefits generally mean higher premiums. Choosing a longer waiting period or a shorter benefit duration can help you find lower premiums.

Multiple quotes allow you to assess whether you're getting most of what you want from a given provider and if other providers can offer that coverage for a better rate.