Disability insurance is just one of the ways you can protect your income if you can’t work due to an injury or illness. For those in traditional employment, disability coverage usually comes through group insurance arranged by the employer. Self-employed people, on the other hand, must obtain disability insurance on their own.
Luckily, this post will show you how. Even if things may seem a little complicated at first, rest easy knowing that you’re taking the right steps to protect your income and your family’s well-being. Let’s get started!
What is disability insurance?
First, let’s get the basics out of the way. What is disability insurance?
Disability insurance is a financial safety net that kicks in during an unforeseen and debilitating illness or injury that prevents the policyholder from working and earning an income. While this definition seems simple enough, disability coverage is quite complicated, as the terms and conditions of various policies can differ vastly.
At the highest level, disability insurance plans replace a portion of the policyholder’s regular income up to a predetermined total amount. However, policy terms, such as the definition of what is considered a disability, the renewability of the policy and the benefit period, make a big difference when it is time to make a claim. And don’t worry. We will cover all of these and more in the next section.
Disability insurance may be provided by an employer through what is called a group insurance plan. It can also be purchased individually by self-employed individuals or those looking to supplement their group disability insurance. There are two different types of disability insurance: long-term and short-term.
Long-term disability insurance
Long-term disability insurance (LTD) plans provide disability benefits for a minimum of two years, meaning you will receive monthly benefit payments for two or more years in the case of a disability. Most LTD plans replace 60% to 70% of the policyholder’s normal income and kick in after any federal Employment Insurance (EI), paid sick leave, or other short-term disability insurance payments cease.
Long-term disability insurance applicants can usually choose between various benefit periods upwards of two years. Some policies offer benefits until the policyholder turns 65.
Short-term disability insurance
Short-term disability insurance provides benefits for up to six months in the case of unemployment resulting from a disability. Most traditional employers have programs in place that provide this type of insurance, such as paid sick leave or short-term disability coverage paid through employee benefits.
Self-employed professionals should register for the federal EI program to stand in for short-term disability insurance, which pays 55% of your regular earnings for up to 15 weeks (just short of four months.) If you are not registered or eligible for EI, you may consider short-term disability insurance, though long-term policies may be a better option to ensure you are covered for the entire duration of your disability.
Do self-employed people need disability insurance?
Self-employed people definitely need disability insurance. In fact, they should consider disability insurance as a crucial part of their business.
It is impossible to predict whether an illness or injury will prevent an individual from working, and not having a safety net in place can be catastrophic for both the business and the individual’s personal finances, especially in the long term.
It’s also important to note that disability insurance plans bought individually are usually much more extensive than those that are provided by employers. As such, you can be sure that your disability insurance as a self-employed professional is underwritten specifically for you and that it will cater to you and your needs much more efficiently. This is all the more reason to consider disability insurance as a self-employed person.
What to understand about disability insurance for self-employed professionals
Those employed by traditional employers will usually be uninvolved in arranging their disability insurance coverage and terms. Self-employed professionals, on the other hand, need to be well-versed in the topic to ensure they are buying the correct policy.
So, here are all of the details that you should be aware of before buying disability insurance as a self-employed person. When in doubt, please ask for clarification from the insurance agent and do your best to get your coverage tailored to you. The process may be cumbersome, but the policy you’ll have afterwards will offer much better benefits than a group policy would.
Scope of disability
The definition of disability can be different in each policy and is a crucial part of determining whether or not you’re eligible for benefits in the case of an illness or injury. What kind of a disability you have (e.g. physical or mental, new or the flare-up of existing conditions) and what kind of job you can and cannot do as a result of that disability determines how much coverage you can receive, if any.
Generally, the definition of disability in most policies is one of the two following options: disability as the inability to do one’s “own occupation” or disability as the policyholder’s inability to do “any occupation.”
The latter definition (i.e., the inability to do “any occupation”) can be harmful to a trained professional who is highly skilled and paid well for what they do. Take, for instance, a welder. If his or her illness or injury prevents them from welding but not from taking orders at the local fast-food restaurant, they wouldn’t be considered as disabled and thus receive no benefit while having to take a major pay cut due to their illness or injury.
If the policy defines disability as the inability to do one’s “own occupation,” then the welder, in this case, would receive benefits even if they are able to work at the restaurant or any other less physically demanding job. That’s what makes the definition of disability particularly important.
It’s also important to note that an insurance company may pay disability benefits to the policyholder who’s unable to do their “own occupation” for a specified time and then switch to “any occupation” afterwards. These nuances around the definition of disability should be closely examined, understood and negotiated before buying disability insurance.
Most individual disability insurance policies cover up to 70% of your regular monthly income in the case of a disability (as defined by your policy). This is more than the 50-60% offered through group coverage plans.
The monthly benefit you are eligible to receive in the case of a disability is purely dependent on your regular income. This is why you need to disclose two or three years’ worth of earnings when buying disability insurance for self-employed people, as well as when making a claim.
If you are a contract worker or freelancer in any way, I know this might be tough. The more stability you can account for through your income sources, the easier it will be when you are making a disability insurance claim.
The good thing is that while group policies usually do not take bonuses or commissions into account, individual plans usually do. Disability insurance for self-employed and salaried people alike usually payout on a monthly basis after the waiting period is over, which we’ll cover next.
Benefit and waiting periods
Two time periods are important to consider when getting disability insurance as a self-employed person. The first is the benefit period, which represents the maximum amount of time you can receive benefits in the case of a disability. A benefit period of fewer than two years is categorized as short-term disability insurance, whereas two or more years is considered long-term. The benefit period is up to the policy buyer to choose, but it’s good to consider that a longer benefit period will result in higher premiums (and vice versa.)
The second time period to consider is called the waiting period, which is the minimum amount of time you must wait before starting to get your benefit payments after you become disabled. This period might be anywhere from 30 days to two years. Shorter waiting periods usually result in higher premiums.
How much you pay to buy a given insurance policy is called a premium. Disability insurance premiums can be anywhere between 1 to 3% of your income, with several factors affecting this amount.
We already went over the fact that the higher your annual income, the higher your monthly benefits would be in the case of a disability, and thus the higher premium will be. Some of the other factors affecting the cost of your insurance policy include your gender, age, occupation, health status, and plan details. Let’s briefly go over these.
Gender: it’s common to see disability insurance premiums being higher for women than they are for men, as women are statistically at a higher risk of disability. This is the opposite for life insurance plans (where men pay more) because men have a shorter life expectancy than women.
Age: the chance of disability is positively correlated with age, meaning you pay more for disability insurance as you grow older.
Occupation: some jobs are more likely to cause injuries that prevent you from working for an extended period of time. As such, more physically demanding jobs result in higher premiums than those that are considered to be safer, such as office roles. Insurance companies have a ranking system that determines the disability risk of the applicant’s job and set the premium accordingly.
Plan details: as we mentioned, not all disability insurance plans are created equally. If your plan’s waiting period is short, you pay a higher premium. If your benefit length is long – let’s say, five years rather than two – this will also increase your premium. Conversely, how disability is defined in your coverage may also affect how much you pay. For instance, “own occupation” plans are generally more expensive than “any occupation” plans.
The renewability of a policy refers to the insurer’s promise that your disability insurance will not be cancelled and your premium will not go up. This can give you the peace of mind that you will not suddenly lose your disability insurance or have to dish out a lot more money for your monthly premiums. Such insurance policies are called “non-cancellable and guaranteed renewable.”
If the insurer is worried about the stability of your income, however, you may have to settle for just a “non-cancellable” policy and forgo the “guaranteed renewable” part. This means that your insurance policy is assured not to be cancelled, but the premium may go up based on the insurer’s discretion.
Riders are optional extras that you can purchase to make your disability insurance more extensive, flexible or suitable to you and your needs. Some examples of optional riders include partial disability benefits, future increase options, cost of living adjustments, and premium refunds. Let’s briefly go through these.
Partial disability benefits: by including this rider in your disability coverage, you’re eligible for benefits even if you’re not 100% disabled as defined in your insurance plan. You can file a claim and receive payouts if your income has been reduced by 15-20% due to your disability.
Future increase option: buying new insurance policies is a lot of work for both you and the underwriter. If you predict that your income will considerably increase in the near future, you can include a future increase rider in your policy to raise your coverage without the need for a brand-new policy.
Cost of living rider: Let’s say you are unable to work for five years due to an illness or injury and collect monthly benefits through your disability insurance. Buying a cost of living rider will ensure that the amount you receive rises by a few percentage points each year to account for inflation.
What you need to know about taxes when it comes to disability insurance for self-employed individuals
Any self-employed person knows that filing taxes can be one of the most complicated parts of running your own business. Here’s what you need to consider about your taxes when you get disability insurance.
Are disability insurance premiums tax deductible for self-employed individuals?
Disability insurance premiums are the monthly or yearly payments you make for your disability coverage. As a self-employed individual, your disability insurance premiums are unfortunately not tax deductible because they are considered a personal expense.
While you are not eligible to deduct the premiums of your life or disability insurance as a self-employed person, you may be able to deduct the commercial insurance premiums you pay for things such as buildings, machinery and business equipment. The full details of everything you can deduct from your taxes as a self-employed professional can be found on the Canada Revenue Agency (CRA) website.
Are disability insurance benefits taxable for self-employed individuals?
If you pay for your own disability insurance (as opposed to an employer paying for it), the benefits that you receive as a result of a disability insurance claim are not taxable. This means that self-employed individuals cannot be taxed on their disability insurance benefits as they are on their regular earnings.
As a reminder, please always consult with a tax professional regarding important tax implications.
Final thoughts about disability insurance for self-employed professionals
You have a lot of different hats to wear as a self-employed professional, overseeing everything from your marketing, your taxes and your client relations. With so many things to think about, insurance can often be something that is overlooked.
It’s hard to understand the value of insurance until you are in a situation that threatens your health or your property. If you are struck with a sudden illness or injury that prevents you from working, disability insurance can be a saving grace.
Buying disability insurance can be much simpler if you understand the concepts discussed in this post. We hope that it was helpful.
FAQs about disability insurance for self-employed people
The premiums paid for disability insurance are not tax-deductible for self-employed professionals. This is because disability insurance is considered a personal expense (i.e. it is independent of your business.) Insurance for business equipment, motor vehicles and buildings, however, may be tax deductible.
Conversely, if you make a disability insurance claim and receive benefits, you will not be taxed on these funds as you would on regular earnings (given that you paid the premiums yourself.)
The cost of disability insurance highly depends on how much money you make each year, as this affects the benefits you receive in the case of a claim. Things such as gender, age, occupation, health status, the definition of disability and other plan details also make a difference in your premium costs.
On average, your disability insurance will be 1-3% of your annual income. For someone who makes $100,000 per year, disability insurance would cost approximately $1,000 to $3,000 each year, either paid upfront or broken down into monthly payments.
No, disability insurance premiums are not deductible for self-employed professionals because this type of insurance is considered a personal expense.
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