Do I need long-term disability insurance?

One of the most overlooked yet critical insurance a self-employed individual should consider is disability insurance. Why? Being self-employed can certainly be rewarding. However, it also comes with its own set of challenges one of which is the lack of benefits being employed by a company may provide.

Unlike traditional employees, self-employed individuals are responsible for providing their own benefits such as health insurance, retirement savings, and disability insurance. If you have been considering getting disability insurance, here are some things to consider when shopping for disability insurance.

First, let's cover the meaning of long-term disability. For this article, we will be considering what is defined as, "Own Occupation Long-Term Disability Insurance."

What Is Long-Term Disability Insurance?

Long-term disability is a financial benefit provided by an insurance carrier that provides monthly payments to disabled individuals if they are unable to work for an extended period of time. Long-term disability can be used to cover temporary disabilities as well as permanent disabilities.

When you purchase long-term disability insurance, you apply for insurance that is specific to your occupation, health, and income. What does that mean?

Long-Term Disability Insurance Is Occupation Specific

When you apply for long-term disability insurance, you are insuring your ability to work in your particular profession. Someone who is a contractor, surgeon, or lawyer might have different long-term care insurance definition as to what is required to perform your work to a reasonable degree.

For example, a surgeon has arthritis and is no longer able to perform surgeries. A contractor who is diagnosed with chronic backache may no longer be able to perform construction work, etc. 

This is because your occupation has a significant impact on your ability to work depending on your disability. If you are unable to return to your specific profession, the insurance company will pay you a benefit all the way up until retirement or another date specified in your contract.

Disability Insurance Is Specific To Your Health

When you apply for disability insurance, you go through an underwriting process much like life insurance. This means that your medical records will be reviewed by an underwriter, who may deny you coverage based on your medical condition or lifestyle.

For example, if you are a smoker or participate in risky activities such as skydiving, you may not be eligible for disability coverage or your rates can be increased. 

Being honest with your financial professional about some of these concerns is important because they can provide you with insurance options and recommendations that will help you obtain vital information before applying for coverage. If you apply for coverage without the necessary information, it can result in getting a denial from the insurance company. Once you are declined for coverage it is possible that it can affect future coverages not only for disability insurance but for other health-related insurance coverages. 

Disability Insurance Coverage Is Determined Based On Your Income

As you know, when you are self-employed your income can fluctuate from year to year. This may affect how much you can insure because insurance companies may not let you insure for a larger amount than your current earnings. A typical long-term disability insurance will aim to replace about 60%-80% of your income. So what will the insurance company consider when determining your current income? Most companies will look at your adjusted gross income or AGI for the last 2 years. This is the amount you earn before deductions and exemptions are taken out.

You can always re-apply for more insurance as your income grows. However, you may need to go through underwriting and the additional premium is usually based on the age you are applying for. Most companies offer a cost of living adjuster that can increase your benefit amount by about 5% annually. This will be placed on a rider to your policy and will cost you an additional premium.

There are other multiple riders and different policy provisions that you should understand before submitting an application for disability insurance. We advise you ask a financial professional for those information.

All in all, buying long-term disability insurance can be one of the best decisions a self-employed individual can make. Statistically, by the age of 65 one in seven people will have suffered from a long-term disability lasting five years or more. That's almost a 15% chance that you will suffer some kind of disability. However, the greater majority do not have anywhere close to enough to financially navigate that kind of financial setback.

If you have been considering disability insurance, don't put it off any longer. Our financial professionals will help you make an informed decision by providing you with different options from multiple companies, advising on any health-related questions, and helping to figure out the most efficient way of handling your insurance. So make sure that you have the protection of long-term disability insurance for yourself and your family and schedule an appointment with us today!