If you’re a small business owner or independent contractor, you already have a lot to worry about. For instance, you’re completely in control of how much money you’re making; and sick days and vacations don’t mean the same thing as when you worked for someone else.
You’re also entirely in charge of your own financial safety net, including insurance products. But while you’re thinking about health insurance or life insurance, you may be missing a crucial policy: disability insurance.
What is disability insurance?
Disability insurance is an insurance product designed to replace your income if you become disabled. The best policies cover the majority of your pay cheque (after taxes) and will pay until your disability ends or until age 65, whichever comes first.
Determining your level of coverage
Figuring out how much coverage you need as a business owner can be a bit challenging at first. For people who have a regular 9-to-5 job and collect a pay cheque, calculating how much coverage they need is easy -- they simply take their income, figure out how much they receive after-tax, and apply for that amount of coverage.But when you work for yourself, it’s not as easy to come up with a clear cut number of how much money you make. As you know, your business’s income is not always consistent from month-to-month or even year-to-year.
How do I prove my income to the insurance company?
If you’ve been a small business owner or independent contractor you'll need about two years of filed tax returns to qualify. If you have industry experience as an employee prior to being self-employed and are now an independent consultant with a contract in hand, you may be able to be insured with less than two years of proven income.In addition to providing tax returns, the insurance company will ask for a copy of your income and expense statement (profit/loss), as additional proof of income. Note that insurance companies are going to cover your take home pay, not what your business made.
What if I've been doing this for less than two years?
As mentioned, previous industry experience and income will improve your ability to purchase coverage. If you just left employment and are now on your own with a contract in hand, you can apply for coverage at about 75% of your current projected income. Ask your insurance advisor to find the best fit for your situation. If you are in a graduate program, some insurance companies will insure you in advance of graduation at a "starting practice limit." This is a minimum amount of coverage you can receive while you're still in school. Examples include law school, medical school and engineering. Make sure to buy your policy with a rider that allows you to increase your coverage when you're practicing without having to provide evidence of good health. Again, check with your professional insurance advisor for help in seeking out a contract that's right for you.
Are my premiums tax deductible?
No, they are not. However, if you do ever need to collect the benefit, it will be tax-free.
Why is disability insurance worth it?
Because you have about a 25% chance of experiencing a disability at some point in your life. Insure the goose that lays the golden egg! Your income is your greatest asset. Disability insurance is the only insurance product that will cover your income for the entire duration of your disability; it's a crucial part of building a financial safety net and laying a secure foundation under your financial house.
Related reading: What You Need to Know about Applying for Disability Insurance
Interested in learning more about Disability Insurance and how it can help your business and your family? Download our free ebook: A Beginner's Guide to Disability Insurance.