Help me understand disability insurance please.

March 22, 2009 8:44 PM

How does disability insurance work for a freelancer?

I am looking to start doing freelance work and am looking into health insurance and the like. Disability insurance normally pays a percentage of your normal monthly salary...but freelancers don't exactly have a a monthly salary...so how does it work? Is it even required? I see posters that say disability insurance is required by federal law for companies with one or more employees, does that include people that are self-employed?

posted by thebestsophist to work & money (6 comments total)

Just because freelancers don't pay payroll taxes on every paycheck doesn't mean that their liabilities are any lower than traditional employees. This is in part what self-employment tax is for: Social Security is also the program that pays disability benefits. You only pay it when you file your taxes, but you do have to pay it.

The one thing you don't get is unemployment insurance. That's just one of the drawbacks.
posted by valkyryn at 5:50 AM on March 23

Yes, you can get disability insurance as a freelancer. No, you are not required to. I don't know what insurers use as the basis for the payouts (my experience with insurance companies makes me cynically suspect it would be something like "the year in which you earned the least over the last 10 years").

I'm a freelancer. I spoke to a financial advisor a while back and the subject came up; he said it would be unrealistically expensive, so I didn't pursue it any further.
posted by adamrice at 6:22 AM on March 23

I think that the "percentage of your income" rule is an abstraction to make selling disability insurance easier to employees. At its most basic, I would expect that it's simply X premium for Y coverage. So figure out what your income would need to be should you become disabled, subtract other income sources (like SSA) and give that number to the insurance person. They, I imagine, would give you the price for that coverage. Valkyryn is right, if you pay SSA, you get that coverage. So a private policy would only have to cover the gaps that you'd want covered. You'd have to look at your yearly SSA statement to see what your current level is, and investigate exactly what sorts of disabilities are covered and at what rates. SSA uses a fairly long income history to determine coverage levels, so you shouldn't have to worry too much that a bad year or two would change your coverage level. (It may even be possible to overpay to get better coverage- if I have a down year and it will affect my levels, maybe I pay more than the 13% to maintain my apparent income level??) And their coverage is fairly good, provided you actually have an allowable disability. Granted, I don't make a whole lot of money, but I'm 33 and my total disability coverage is about 4/5 of my current income.

(I'd be surprised if there wasn't a way to "buy into" state unemployment insurance, or to get a private unemployment insurance policy. Sort of the same idea- your premium would be based on how much coverage you'd need and how long you'd want the coverage to last. I'm pretty sure there are products like this that exist for small businesses, that cover unexpected cash-flow losses. I want to say that when I worked for a retail place, their business insurance covered income losses should there be an incident. So, the place burns down. The insurance covered the asset losses, but also provided for x days of cash flow in order to rebuild the business. It's probably not cheap though.)
posted by gjc at 6:40 AM on March 23

gjc, being self-employed is an automatic disqualification criterion for most state unemployment benefit programs. Private policies may well exist--I'm sure I don't know--but state benefits are largely dependent upon traditional employers picking up the tab. In the absence of such an employer, you're SOL.
posted by valkyryn at 8:34 AM on March 23

Thanks so much, that clears up a whole lot!
posted by thebestsophist at 12:05 PM on March 23

As recent events should have made painfully clear, you can buy insurance for _anything_. I'm self-employed. I have disability insurance. I pay x premium a year for y coverage per month if I'm out of work long-term due to disability. It is not terribly expensive if you're in good health.
posted by Caviar at 9:13 PM on March 24