The Guide to Buying Disability Insurance for Self Employed People
Purchasing disability insurance for self employed individuals can be a challenge.
You run a successful business. For most individuals, this means you probably have a few employees, maybe some inventory, or intellectual property. A disability, especially one that lasts more than one year, might destroy your revenue and end all the hard work you’ve put in over the years.
The simplest way to protect against this potential situation is to purchase individual disability insurance. Disability insurance for self employed people can cover your personal needs, or if you’re in a situation where you have overheads or a partner, it can protect your business interest.
However, you will likely have a few issues. Disability insurance carriers tend not to like covering self-employed people. The best disability insurance for self employed people might not be attainable if you’re not looking at the right carriers.
If you work for a company or have a traditional profession, such as a physician or certified public accountant, your underwriting for a disability insurance policy will be fairly straightforward.
If you are one of the millions of business owners who do not fit this mold, then you’re in for an interesting ride when buying the best disability insurance for self-employed people.
Nearly every carrier will ask you a whole host of intrusive questions. They normally start with ones like this:
- Are you working from home?
- What was your net income over the last 2 years?
- Do you have employees?
- Are you a new business?
Your answers to these questions can dictate your benefit amount, benefit length, and even occupation class. All of these factors have a major impact on your allowable policy design.
Your first-choice carrier may also choose not to offer you adequate coverage.
Primary Self Employed Disability Insurance Plans
Your first goal should be to find an individual disability insurance plan. This policy is to protect your family and help you maintain your lifestyle should you become sick or injured and unable to work.
As an independent insurance broker, our process is simple and built around the acronym K.E.E.P.
First, we help you understand how a disability insurance policy is built and what options might be available. Unlike traditional professions, disability insurance for self employed individuals has a few more moving parts. You may qualify for less or more coverage than someone with your same earnings who works for a company. For this reason, it is important to know what’s important to you, and what you may be eligible for.
We’ll give you a solid knowledge base to help you make your decision.
Now that you’re confident in knowing the ins and outs of a disability insurance policy, it’s time to evaluate your options.
As mentioned earlier, disability for self employed people takes into account a number of different factors. There is no such thing as the best disability insurance for self-employed people. The best policy is the one that fits your needs and goals.
Once we understand what’s important to you, we’ll look at all of the major carriers that will consider the plan design that you’ve chosen.
To do this, we’ll first gather basic information (including health and income information) about you and your business. From there, we can submit this to several carriers and see what offers may be available. Our key carriers for primary disability insurance cover are:
- Assurity Life Insurance
- Illinois Mutual
- Mutual of Omaha
- Ohio National
- The Standard
These carriers are the top of the line providers for the best disability insurance for self employed individuals.
Once you’ve selected the policy that best fits your needs, we’ll complete the application together.
This is often done through a digital app using electronic signatures, however, some carriers still use paper or telephone interviews. Throughout this process, the one thing that we ask you to remember is that if done correctly the first time, you shouldn’t need to apply for disability insurance ever again.
From there, the carrier will likely order a medical exam to be completed at your convenience. They will also probably order medical records from your doctors. Tax returns are also an integral part of the underwriting process, so providing these at the outset can help speed up approvals.
Well, hopefully, that’s the email that you’ll see from our agency if so.
Once the disability insurance company of your choosing has approved your application, we’ll review the policy to make sure that it accurately reflects your goals and objectives.
From there, you’ll sign a few pages, pay the premium, and then you’ll be covered for as long as you own the policy. If you’ve bought coverage from our agency, the vast majority of disability insurance for self employed people is non-cancelable and guaranteed renewable.
This means that the insurance company can’t cancel your policy, nor can they raise your premiums. You will own this policy for as long as you want it or until you’re no longer covered under the terms of the contract.
We’re also here for you if you need to make a claim or if you’d like to increase or decrease your coverage. Since you’re going to be in this for the long haul, we’ll be here to help answer any questions and service your policy when you need it.
A Basic Summary of Getting Disability Insurance for Self Employed People
The first thing to determine is how much coverage you will need and what the policy design should look like.
From there, you will need to determine the percentage of your current monthly income for which you would like to apply. Most self-employed individuals apply for the maximum, since any loss of income is likely to be catastrophic.
This is often where we run into a major issue. For most business owners, the write-offs are substantial, and many look to pay as little in tax as possible. Many business owners want to show as little income as is legal and are perfectly happy operating with a balance sheet that reflects relatively little income. Just like procuring a mortgage, this can hurt the self-employed disability shopper.
Carriers will want to look at tax returns, monthly tax stubs, and audited profit and loss statements from your CPA. The carrier must establish an income stream. If that income stream is being reduced due to write-offs, then it can disallow the small business owner from purchasing the maximum coverage.
If you have a capital-intensive business, like a dentist or an owner/operator truck driver, then you can look at business overheads expense insurance to offset any personal loss of coverage.
If you have business partners, then we may also explore disability buyout coverage.
From there, we will submit a preliminary application or an indication of interest to the carriers and see who might make us an offer. We will review the potential offers and then submit a formal application to a single carrier.
As mentioned earlier, there will likely also be a non-invasive medical exam. This exam is done at your home or office and rarely incurs any costs to you. The carrier may also request medical records from your doctors, which normally requires no action on your part.
Once we secure primary coverage, it may make sense to look for additional coverage. If you have a very successful business, business partners, or substantial overheads, be sure to secure additional disability insurance. Getting disability insurance for self employed individuals can be challenging, however, it is very important if you fit into that category. Even if you have a primary plan in place, it may not offer enough coverage.
A supplemental plan can fill this gap. As an agent for Petersen International, we can consider supplemental coverage from Lloyd’s of London. A supplemental plan is a secondary policy that can offer higher coverage amounts, based on a maximum allowable percentage of your monthly income. The percent amount is 65% of your monthly income.
A typical disability insurance policy from a traditional carrier will normally cap out at around 20k per month in benefits. Purchasing a supplemental policy from Lloyd’s can push this amount north of 100k per month.
For high-income earners looking for substantial paycheck protection, nothing will protect your family and lifestyle like a policy from Lloyd’s.
Underwriting a Supplemental Disability Insurance Policy
A traditional disability insurance policy will have several hoops to jump through prior to approval.
Besides all the questions outlined above, the best disability policy for self employed individuals will also require a physical exam, comprehensive financials, and a detailed explanation of your business model.
Once you have a primary plan in place, if you act quickly, a supplemental plan will be the easiest insurance policy you can purchase.
If you apply within 90 days of getting your primary plan in force, you may not have to take an additional exam or provide many of the additional requirements outlined above.
Lloyd’s of London will auto-issue a supplemental policy upon you placing in force a primary disability insurance plan if it is bought through a major carrier, such as Guardian (Berkshire), Principal, or The Standard.
Other Disability Insurance for Self Employed Individuals
Once you’ve personally protected your income, it is time to consider other types of disability insurance.
Protecting your business and/or your contractual business interests is also very important.
Protection for Your Business
Protecting your business means purchasing a policy that is meant to pay the business expenses should you, the owner, become disabled.
This is where a business overhead expense policy (or BOE policy) comes into play.
A BOE policy reimburses the business for expenses incurred while the business owner is disabled. The expenses covered by a typical business overhead expense policy are normally those that are deductible for federal tax purposes.
Examples of such expenses would include the mortgage or rent, salaries, utilities, and some types of insurance, such as malpractice or liability.
If you have a business that incurs consistent and substantial costs to operate, having a BOE policy will ensure that there is a business to return to after you’ve recovered from a disability.
Protection of Your Business Interests
Many businesses have more than one equity partner. If your business has one or more owners, then it may also make sense to also consider a disability buy-out policy.
For businesses that have more than one person involved, some type of succession plan or buy-sell arrangement is normally created.
Sometimes, this agreement is nothing more than an informal handshake (not recommended).
Often, having a more formalized buy-sell arrangement in place is preferable. There are two main components to this arrangement, the legal agreement (contract) and the funding vehicles (insurance).
We have seen buy-sell arrangements that have an agreement with no funding, and we have seen them with no legal documents but with funding in place.
Optimally, your buy-sell arrangement will have both a formal agreement drawn up by your attorney and funding that is secured by your insurance agency.
We handle the funding aspect and that can be broken down into two main parts: life insurance and disability insurance.
The life insurance part is fairly straightforward. A death of an equity owner triggers a life insurance payout which allows the business (or the surviving partners) to purchase the deceased partner’s equity in the business from the estate.
A disability of an owner is not quite as cut and dry, even though the buy-sell arrangement may specify this possibility.
Disability buy-out is normally structured within the confines of the legal agreement, although it can be important to have one regardless.
Offered as either a lump sum or a payout over several years, disability buy-out is another type of disability insurance for self-employed business owners. It has a very long elimination period, normally anywhere from 365-730 days. Once the elimination period has been satisfied, the claim is paid and the disabled owner is considered “bought out”.
While this is something that neither side likely wants, unfortunately, it is the reality. If the disabled business owner is no longer able to grow the revenue and profitability of the business or perform their duties, being bought out is often in everyone’s best interests.
Protecting your business interests with a buy-sell arrangement is important.
Making sure that it is properly funded for all contingencies is nearly as important as the buy-sell agreement itself.
In Conclusion – Disability Insurance for Self Employed Individuals
Disability insurance for self employed individuals is critical. Being self-employed entails an enormous risk/reward opportunity. Not protecting your income or your business can be catastrophic should a disability prevent you from participating in your business growth.
Whether you’re looking for personal income protection, supplemental protection, or coverage for your business or business interests, we can help.
Don’t let a previous decline or a sub-optimal offer derail you from securing what might be the most important insurance you’ll likely purchase. The best disability insurance for self employed individuals is obtainable.
As with any profession, there is no such thing as the best disability insurance policy for self-employed people. The policy that pays claims when you need them is ultimately better than everything else.
High Income Protection is an independent agency that provides expert, objective advice in helping you shop for disability insurance.
Start the Process Today!
Use the form to the left and submit your request. You can feel free to call us direct as well. Our toll-free number is 888-636-2310.
We look forward to hearing from you.