"Your most important asset is your ability to earn": Private disability insurance for freelancers


For the first installment of Finance for Freelancers, I talked with Amy Keller, a Financial Advisor at Della Monica and Associates, a Chicago-based financial advisory practice of Ameriprise Financial Services, Inc. An advisor since 1999, Amy specializes in everything from retirement and tax planning to insurance and asset management. She views her role as that of a financial coach for her clients. Financial planning services offered through Ameriprise Financial Services, Inc., Member FINRA and SIPC.

Amy, when I attended your workshop on finance for freelancers a while back, I was surprised that you placed so much emphasis on private disability insurance. Why is disability insurance so important for freelancers?

A few reasons. First of all, disability is more common than you think. According to the National Safety Council, every ten minutes 490 Americans become disabled.

Two, people who are married can get life insurance through their spouse, but not disability insurance. It's not a benefit you can tack onto someone else's package.

And three, the ability to earn an income is your most important asset—not your home or your IRA. If you have disability income protection, and illness or an accident prevents you from working, you'll still have a paycheck coming in.

When is the right time to buy private disability insurance?

If you're a new freelancer, you're not in a good position to buy. Insurance companies want a two-year history of self-employment earnings. However, if you're working a full-time job and thinking about going freelance, it can be a great time to buy.

The best time to buy private disability insurance is when your earnings are high because by law, disability benefits can replace up to 70% of what your earnings are at the time you apply for the insurance.

It's also best to apply when you're in good health.

I especially like disability insurance for women because they tend to have more gaps in paid work. If you begin a private disability policy while you're working and continue paying the premiums when you take time off to care for your family, then if you become disabled while you're not working, you can still get benefits.

What if I can't afford a policy that will replace a large proportion of my earnings? Is it still worth buying?

That's something to talk to a finance professional about. I try to make sure the premiums are affordable to my clients and allow enough space in their budget for them to save for retirement and meet other financial goals. On the other hand, if it would be difficult for someone to transition into other work, I recommend that they buy more coverage.

Freelancers are more expensive than others to underwrite, largely because of spottiness of income, but depression and back problems are the most common reasons for disability, and the nature of freelancing can make freelancers more prone to those problems.

It's also good to talk to a finance professional who knows insurance because disability policies are complicated, and you want to be sure you get the right kind.

What kind of disability insurance is the right kind?

You want to be sure you have a partial recovery benefit, so if you are able to work part-time after becoming disabled, you can still get the benefit. When people become sick or have cancer, they'd rather work to the degree they can.

There's also a huge difference between "own occupation" and "any occupation." Cheap policies will kick in only if you can't do any occupation. You want a policy that kicks in if you can't do your own occupation.

You want a cost-of-living rider so the benefit has an inflation adjustment—it goes up over time. And you want a future-purchase rider so if your income goes up, you can buy more insurance at your original rate without going through underwriting again.

You also want to be sure you're buying from a well-rated company that will still be around years from now when you need benefits.

What are other benefits of buying private disability insurance?

Benefits under private disability insurance policies are not taxed. This is different from employer-provided disability benefits, which are taxed. Also, if someone draws disability benefits from an employer, that will very often cause them to lose employer-paid life insurance benefits. So it's good to get your own private policy that's not contingent on your job. If you're self-employed, you can deduct your premiums for tax purposes.

Want to know more? Ask Amy!