When you decided to take the leap into self-employed life, you probably had a million different expectations and thoughts running through your head. Days of unlimited PTO, setting your own schedule, being your own boss...oh, and working hard for your customers and clients every day, of course.
It’s a bold and brave move to head out into the unknown lands of freelancing and entrepreneurship, but over 57 million Americans decided in 2019 that it was the right career move for them.
We get it—it’s a great life and career choice. But what happens when something unexpected throws you off track and you don’t have a comfy corporate cushion to support you?
With one in four of us being forced to stop work at some point in our lives due to an illness or injury, having a backup plan in place is one of the smartest business decisions that you can make. That’s where disability insurance comes in.
Now, hear us out. We know that finances can be tight when running your own business, especially if you’re just getting started or bouncing back from a bump in the road. But the real question is, can you afford to stay afloat if the unexpected happens—whether that’s an accident or persistent chronic pain that keeps you from earning an income? If you’re not able to work at all, how will you support yourself and your family?
It sounds scary, but it doesn’t need to be. We’re here to walk you through the ins and outs of how disability insurance could help you, what you’ll be looking at in terms of disability insurance costs, and how much you’re likely to get as a payout if you ever need to make a claim.
Before we dive into how much everything costs, let’s quickly run through what exactly disability insurance is. Otherwise known as income insurance, disability insurance can be used to replace some or most of your income if you’re suddenly unable to work due to a health and wellness condition or unexpected injury.
It’s an extra safety net and peace of mind for both you and your dependents (like your partner or children) for those times when life might throw you an unanticipated curveball. If you need to make a claim against your policy, you’ll be paid out a set benefit amount and can use that money for whatever you like–medical bills, groceries, gas, or even business operations.
Facing a serious health and wellness issue may seem unlikely when you’re young and healthy, and we hope that’s never a situation you’ll be in. But around 25% of today’s 20-year-olds will be out of work for at least one year before they retire due to a disabling condition. Is that a risk you want to take when you work for yourself?
Having some of your own savings is always a smart move, but when there are so many other expenses to take care of, having a sizable pot of change stashed away for a rainy day is often a dream rather than a reality. Disability insurance is there to help plug those holes so that when medical bills start rolling in and your earnings are at a standstill, finances are one less stress on your plate.
So you’ve decided that insurance is something you want to get, but how much is disability insurance going to cost you?
Your premium (the amount you pay to the insurance company each month or year to maintain your policy) is going to be based on a couple of different factors.
There will always be variable policy features that you should look at carefully before making a decision. Some of the key areas that impact the cost will be:
- Coverage amount: How much you’ll be paid if you ever need to make a claim.
- Benefit period: The length of time that you can receive payouts from the policy.
- Waiting or elimination period: How long you’ll have to wait after your health or wellness issue starts before you can receive payouts.
- Riders or clauses: Any optional additions that you may make to your policy to enhance your coverage or adjust it to fit your lifestyle, like student loan protection or cost-of-living adjustments.
This is where you’ll want to try to balance the amount you can afford to pay now vs. what your financial situation might look like if you’re forced to stop working. If you already have a good amount of savings, taking out a smaller insurance policy that only accounts for 25-30% of your income may be enough.
But if all of your income is being split between personal living expenses and running your business, you may need to budget for a higher premium to ensure that you have enough coverage in an emergency situation.
Put simply, the more money you’ll need from the policy to replace your income and the longer you’ll need the payments for, the more expensive your premium is going to be. The same is true for the policy waiting period. The sooner you’ll need the payments to start after your disability begins, the more expensive your insurance.
Lifestyle factors, like your job, age, gender, and any pre-existing medical conditions also play a large part in determining how much disability insurance costs. Some you’ll be able to control, like ditching any particularly risky hobbies (like skydiving, for example) or making your day-to-day work safer, but others are out of your hands.
As with almost anything when it comes to insurance, the younger and healthier you are, the less you’ll have to pay. That’s why it’s a great idea to take out disability insurance as soon as possible–you’ll never be younger and in better health than you are right now.
Men also typically pay less for their disability insurance premiums than women; in fact, women are 20% more likely to be turned down for insurance than men with identical characteristics.
If you’re a smoker, have a chronic illness, or have any other pre-existing conditions, these could seriously impact what you can and can’t receive coverage for. Not only are you likely to be paying more for your premiums, you may also find that you won’t be insured for any medical issues related to these pre-existing conditions. Check the small print of any policy for these kinds of details before you make a commitment.
Finally, the type of job you do can also heavily impact how much disability insurance costs for you. If you’re working in a particularly risky industry like construction or you’ve somehow found yourself as Ryan Reynolds’ stunt double, you’re going to be paying significantly more each month than if you spend most of your day at a desk. If you’re in a risky job, you’re more likely to be injured and, as a result, more likely to make a claim. Insurance companies know this, so they’ll charge you more up front for those policy benefits.
Overall, you’re more than likely looking at spending 1-6% of your annual income on disability insurance for a standard long-term policy, or 2-6% of what your monthly benefit amount would be on the premium.
How much money do you get on disability? Just like the premium, you’ll pay each month, the amount of money you’ll receive from your disability insurance policy (otherwise known as the benefit amount) will depend on what you’ve paid for ahead of time.
There are limits to how much insurance you can get, even if you take out multiple policies. You’ll never be able to cover 100% of your income with one or several policies due to fraud protection regulations within the insurance industry—that’s why it’s important to have some personal savings tucked away too.
But as disability insurance is paid for with post-tax dollars, the payout benefits you’ll receive are also tax-free. That means a policy covering roughly 60-80% of your pre-tax income should cover you for nearly 100% of your take-home earnings.
Think about how much you can realistically afford to live on before making decisions about benefit amounts. It’s also a good idea to factor in some additional funds for unexpected expenses like medical bills and rehabilitation costs that may not be covered by your health insurance. Your disability insurance costs in terms of your monthly premium will be higher, but it’s usually much more affordable to budget for the extra funding in your policy than trying to save that amount on your own.
No one wants to think about something bad happening to them. But when you’re self-employed, having a financial buffer for an unexpected employment situation could be the make-or-break decision that helps you to avoid business closure or even bankruptcy. Taking away the stress of the unknown leaves you with more time to focus on what you do best: serving your customers and clients.
Ready for some added peace of mind? Apply today for “no exam” income insurance from Asteya.