Getting disability insurance when you are self-employed

By: Kimberly Lankford

It can be difficult to pay your bills if you get sick or injured and are unable to work. And it’s even more challenging if you’re self-employed and don’t have the benefit of sick days or any disability insurance from your employer. Without these extra benefits, it can be particularly important for self-employed people to consider getting disability insurance, which can pay out if they’re unable to do their job. But there’s a catch: Even though having disability insurance can be even more valuable for self-employed people, it’s more difficult to qualify for a policy when you’re in business for yourself.

Disability insurance is designed to replace lost income when you’re unable to work. But many self-employed people don’t have a regular salary and their income can vary a lot from year to year, especially as their business is getting off the ground. Insurance companies require you to provide some evidence of your income level before you can get coverage, but the criteria and required documentation can vary a lot by insurer. The following steps can help self-employed people qualify for disability insurance:

Act quickly after you leave a corporate job. Insurers typically look for at least two years of income history to establish stability, but there are some exceptions. If you recently left a corporate job to start a new business, some insurers have special programs that will provide coverage based on your historical W-2 earnings from your old job, even if your new business hasn’t started yet. The coverage is typically limited to about $5,000 per month in benefits, but you can buy more in the future as you begin to establish your business record. It’s important to apply for coverage as soon as you make the decision to leave your job because the longer you wait, the less value insurers can place on your past earnings. This can be a great option for people who are making a career change from the corporate world to entrepreneurship or freelance work.

For example, Saturday Insurance recently helped get disability insurance coverage for someone who spent 20 years at a large consulting firm and then left to become self-employed. They were able to get the coverage before the new business even launched based solely on the business owner’s past W-2s as an employee. The initial coverage was limited to 60% on $100,000 of income ($5,000 in monthly benefit), which provided a good starting point, then the business owner can add more coverage as the business grows.

Provide detailed business records as evidence. If you have already launched your new business but it’s less than two years old, some insurers are willing to consider coverage if you’re able to demonstrate you have a strong business model and have generated consistent revenue. Having good records is essential. It’s best to provide financials produced by a CPA, but you can also build your case yourself with detailed records proving your financial situation, such as invoices, contracts and any tax returns.

It helps to apply for coverage as soon as you need it, so there are no gaps. A large gap in coverage won’t necessarily prevent you from getting coverage, but insurers may wonder why you’re looking for coverage now.

Only buy what you need. It’s tempting to get as much coverage as possible, but it’s important to do financial calculations to figure out how much you actually need to live on. Start with what you need and add onto the coverage as your business and needs grow. If you’re concerned that your health may change and you might not qualify to get more coverage in the future, you may be able to add a rider when you buy your policy that lets you lock in future coverage increases without any new medical underwriting.

Another option is to plan way in advance. If you’re in a full-time job but think you eventually might leave to start your own business, consider getting individual disability insurance while you’re still an employee. This individual coverage can supplement any disability insurance you have from your employer, and you can keep it if you leave your job later to become self-employed. But you need to do this with plenty of time before you leave — insurers usually ask if you plan to change jobs within the next six months and, if so, they’ll evaluate your new job as part of the underwriting. It’s a good idea to apply for this coverage more than six to nine months before you expect to make the career change — or longer.

Each insurer has different requirements before issuing a disability insurance policy, especially if you are self-employed, so it’s a good idea to work with an expert who deals with several companies and knows from experience which ones are likely to insure someone in your situation and the type of documentation you need to provide to strengthen your case.

For more information about disability insurance, and what to look for in a policy, see Picking the right disability insurance policy.

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Saturday Insurance Services, LLC (“Saturday” or “Saturday Insurance”) is a licensed, digital insurance advisor. All tools, quotes, and information provided by Saturday are for educational purposes only and based on the limited information, if any, provided by you. We urge you to consult with your financial and tax advisors before making any purchase decisions. All quotes and estimates are non-binding and are not to be construed as a guarantee you will be able to purchase insurance. Availability of insurance and final pricing is determined solely by our insurer partners and subject to their review and acceptance of a completed application. All product guarantees are subject to the claims-paying ability of your insurer.