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Whether you’re a freelancer, run your own business, or are an entrepreneur, one thing’s for sure—you’re the driving force of the business and the income generated. Taking even a day off could mean the money stops coming in.
Now, imagine the financial consequences of a disability that lasts months—or years. How would you and your business survive?
That’s where long-term disability insurance (LTD) comes in. It provides a monthly benefit if you can’t work because of an injury or illness.
In this post, we’ll guide you through disability insurance for self-employed workers. You’ll also learn tips to get the best policy to protect your income.
Long-Term Disability Insurance For The Self-Employed: What You Need To Know
Whether you get sick or get into an accident, disability income insurance will pay you tax-free monthly benefits after a short waiting period.
As a self-employed worker, this benefit will get you through a difficult time while your income is interrupted by a disability.
Since the insurance company deposits the money into your bank account, you can use the benefit without any restrictions. Most people will use it as income replacement to pay for recurring household expenses like mortgage payments, groceries, utilities, phone bills, and more.
The risks for self-employed individuals
When you’re self-employed, the excitement of being your own boss often means you’ll work much harder for yourself than you ever did for an employer. This often results in working longer hours with fewer breaks.
There’s also the financial uncertainty of not knowing how much you’ll make each month and when you’ll get paid.
For these reasons, self-employed individuals often experience more stress and have a higher chance of burnout. This leads to a higher chance of getting a disability for them. Consider that half a million Canadians cannot work due to mental health issues in any given week.
And since they don’t have disability income insurance through an employer, self-employed individuals have to get income protection from another source.
Can you get disability insurance coverage if you're self-employed?
And that source is personal disability insurance for self-employed individuals. With a personal disability insurance plan, you receive a monthly tax-free benefit if you become disabled because of an illness or injury.
Applying for self-employed disability insurance is not too different from disability coverage for the employed. Insurance companies will look at your income and experience in the field when deciding to offer you disability coverage.
How much you earn matters
How much disability benefits you can buy depends on how much you earn. The more you earn, the higher the benefit you can get. Salaried employees can easily find their earned income on their T4 slips.
However, earned income is harder to calculate for self-employed workers. Do you include dividends? What if your income is inconsistent year over year? These are the questions that the insurance company would need to know to determine how much disability coverage you can buy.
Sole proprietor
The earned income of a sole proprietor is usually 100% of the business’s net income after deducting business expenses.
Partnership
The net income of a partnership is allocated to the partners based on their percentage ownership, as declared on their income tax returns.
Shareholder of a corporation
Incorporated shareholders can include their salary, fees, bonuses, and commissions, as well as their portion of the corporation’s net income before taxes. Because dividends can be paid from prior years’ retained earnings, they’re irrelevant in determining your earned income.
For all of the above, you can increase your net income (after business expenses, before taxes) by 20% to determine your maximum monthly benefit.
For example, if you earned $100,000, you can increase this to $120,000 and buy $5,925 in monthly benefits instead of $5,200.
Designing An Individual Disability Insurance Policy For The Self-Employed
Now that you know the significance of LTD insurance, what does a policy look like? If you’ve ever had coverage through an employer or association, an individual policy for small business owners looks similar.
Benefit period
This refers to how long you receive the disability benefits while you’re disabled. On the short end, you can choose a two-year period.
However, that doesn’t give you any protection for long-term disabilities. Therefore, the best choice is the maximum benefit period, which pays out while you’re disabled until you reach age 65. Other benefit periods include 3, 5, and 10 years.
Waiting period
The waiting period—also called the elimination period—is how long you have to wait before benefits kick in when you become disabled. While the shortest period is 30 days, you can keep your costs low by choosing 90 or even 120 days.
That’s why it’s important to have an emergency fund to maintain financial stability while you’re waiting for disability benefits to begin.
Otherwise, you can register for Employment Insurance (EI) and receive sickness benefits. As of 2023, EI pays 55% of your earnings for 26 weeks, up to a weekly maximum of $650.
Benefit amount
This refers to the monthly benefit that you will receive on a disability claim. It’s proportional to your monthly income and will never exceed it.
For example, if you make $5,000/month, you can buy up to $3,500/month in benefits. Since you need disability insurance for income replacement, you should always get the most you qualify for based on your earnings.
Definition of disability
The policy’s definition of disability plays a crucial role in determining if you qualify to receive benefits. Most policies have a regular occupation definition, meaning you qualify if you can’t perform the tasks of your regular occupation.
For some occupations, you can upgrade it to own occupation definition. This means you can receive benefits if you can’t perform the tasks of your job even if you’re working in another occupation.
Renewability
Some policies guarantee that the premium won’t change, and the insurance company won’t cancel your policy. Called non-cancellable and guaranteed renewable, these are the best policies you can find.
However, new business owners might not be able to buy non-cancellable policies right off the bat. That’s because a lack of consistent income that comes with starting a new business might make disability insurance companies hesitant to offer non-cancellable policies.
If that’s the case, you can get the next best thing—guaranteed renewable. With a guaranteed renewable policy, the insurance company can’t cancel your coverage. However, it can increase the premium if it experiences many claims for people in your category.
Riders
Riders are additional benefits that you can buy to upgrade your policy. For example, you can buy a residual disability or partial disability rider. This lets you collect partial disability benefits even if you’re not totally disabled.
You can also get the cost-of-living adjustment rider that increases the benefit annually while you’re on a claim. This helps the payments keep up with inflation.
Another common rider is the future income option, which lets you purchase additional coverage later without any medical evidence of insurability. It’s a great option if your income is low, but you anticipate that it will increase in a few years.
Built-in benefits
Some disability income insurance policies also come with built-in benefits at no additional cost.
This can include catastrophic disability, which pays out 25% more if you’re not likely to recover from your injury or illness. For example, you lost your vision in both eyes or hearing in both ears.
Another built-in benefit is the death benefit, which pays 3 times the monthly amount to your loved ones if you pass away during a disability claim.
How Much Does Self-Employed Disability Insurance Cost?
The cost of self-employed disability insurance varies quite a bit depending on the factors below. But you can budget between 1-3% of your annual earnings to pay the premiums.
Factors that affect the cost
Income
Why does your income affect the cost of disability insurance? Because, how much monthly benefit you can buy depends on your business income. The more you make, the larger your benefit amount, and the greater your monthly premiums.
Here are some common income amounts and their corresponding maximum benefit.
Annual income | Monthly income | Maximum monthly benefit |
|---|---|---|
$30,000 | $2,500 | $1,900 |
$50,000 | $4,167 | $3,000 |
$75,000 | $6,250 | $4,175 |
$100,000 | $8,333 | $5,200 |
$120,000 | $10,000 | $5,925 |
Age
Your chance of getting disabled increases as you age. Therefore, the longer you wait, the more you’ll have to pay for a disability insurance policy. For example, a 50-year-old might have to pay double the amount a 35-year-old pays for the same coverage.
Gender
Did you know that women are more prone to disabilities than men? For that reason, disability insurance costs between 25-75% more for women than men. That’s the opposite of life insurance, where women get the better rates.
Occupation class
As a self-employed worker, the type of business you engage in has a major impact on your rates. Are you in the office all day working away on the computer? If so, your rates will be low compared so someone who works a more physically demanding or hazardous job.
Disability insurance companies typically rank the occupational classes with a lettering system. 4A is the lowest risk and has the lowest rates, followed by 3A, 2A, A, and B. Occupation class B has the highest risk and premium.
A small business owner with manual duties might fall under B to 2A, depending on the type of job. An independent contractor with only office duties might qualify for 3A, as may other small business owners without manual duties.
If you’ve been a business owner for at least 2 years with at least 20% ownership, you may be able to upgrade your occupation class to lower your premiums. Eligibility will depend on your income, occupation, and years of related experience.
Plan design
The way you customize your disability insurance plan also impacts your cost. For example, if you want the best disability insurance policy, you can choose a shorter waiting period, longer benefit period, and higher benefit amount.
You might also want additional benefits like partial disability and residual disability riders. While this provides the best disability coverage, it’ll also cost more than a basic disability policy.
Is disability insurance for the self-employed tax-deductible?
Premiums for a disability insurance policy aren’t a business expense. As a result, you can’t deduct them from your business income.
Fortunately, you do get a tax break if you end up on a claim. That’s because insurance companies pay disability benefits tax-free. So while you can’t replace all your income on a pre-tax basis, it’s pretty close after tax.
For example, suppose you earn $60,000. In BC, after federal and provincial income taxes as well as CPP and EI contributions, your net take-home pay is $45,000. On a monthly basis, this equates to $3,750/month. If a disability occurs, you receive $3,500 in monthly benefits, providing sufficient income replacement.
Is disability insurance worth it for self-employed workers?
Buying disability insurance for self-employed individuals is one of the most critical things you can do to protect yourself and your family.
Whether you’re an independent contractor or a sole proprietor, you’re one of the millions of self-employed workers in Canada without access to group long-term disability insurance.
For a small cost, you get peace of mind knowing that if a serious illness or injury occurred, you could still make ends meet. That’s why disability insurance is worth it.
Other Types Of Disability Insurance For Your Business
If you are a small business owner, buying an individual long-term disability insurance policy is only the beginning. As a personal income replacement tool, it offers no protection for your business.
Once your business grows to a certain size, you may want to consider some of the following types of insurance coverage.
Business overhead expense insurance (BOE)
Your monthly business expenses like employee salaries, rent, and utilities continue even if you can’t work.
That’s where business overhead expense insurance comes in. As the name suggests, it provides payment for business overhead expenses, such as:
- Employee salaries
- Utilities
- Rent
- Property taxes
- Interest from business loans
And more. These policies have a shorter elimination period, like 30 days, so your business’s cash flow isn’t interrupted.
They also have a shorter benefit period of 24 months. If you’re still disabled beyond that, at least the benefit would have kept your business afloat so that you can sell, liquidate or hire someone to manage it.
These types of policies are essential for self-employed professionals of practices where revenue depends solely on them. For example, dentists, lawyers, accountants, physicians, and engineers would be well-suited for BOE insurance.
CRA considers the premiums of a BOE policy to be a business expense. Also, benefits are taxable for business owners. As a result, you can deduct the premiums from your business income.
Group short-term disability insurance (STD)
STD insurance pays out a weekly benefit for up to 26 weeks. Unlike long-term disabilities, you can’t buy personal disability insurance coverage for STDs.
That’s why if you have employees, you may consider group coverage for STD. This provides short-term disability coverage for you and your employees.
Group long-term disability insurance
One of the most sought-after benefits for employees is group long-term disability insurance. Like an individual disability policy, a group plan provides long-term disability coverage for up to age 65.
The benefits for group coverage are usually worse than an individual disability policy. It has a lower benefit amount, a more restrictive definition of disability, and lacks riders like cost-of-living adjustment and future income option. Benefits are also taxable for the employee.
Having said that, it’s still a good option for employees who often don’t carry an individual disability insurance policy.
Are You Self-Employed And Need Long-Term Disability Insurance?
What would you do if you couldn’t work for an extended period of time?
Sadly, there’s no way to predict the future. You could get injured or sick and be unable to work for months—even years! That’s why as a self-employed person, it’s so important to buy disability insurance.
Getting LTD insurance is a smart move because it can help protect your income if you’re ever unable to work due to injury or illness. The good news is that if you’re reading this, you’ve already taken the first step to obtaining coverage.
Contact us today at info@briansoinsurance.com or 604-928-1628 for a free consultation and no-obligation quote!
Get Your Disability Insurance Quote Now
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Hello
I have a personal disability plan that denied my insurance when I became ill. I still pay for this plan and would like to cancel or change to a different company altoghere. I am self employed incorporation and turning 56 this year.
Thank you for this thorough and comprehensive article. I would like to reach out to you in the future for an education article for my website. Who should I speak to?
Hello,
Do you offer BOE and / or Key employee coverage?
If so could you please forward any relevant info, and / or set up a phone call to discuss.
Thanks
Tony
7802220475