Can I Get Disability Insurance If I’m Self-Employed?
If you’re self-employed, you can purchase disability insurance to cover you (and your employees, if you have them) if you’re unable to work due to injury or illness.
An injury or major illness can cause major financial challenges when you consider your lifetime earning potential, not just what you earn annually. And that’s true across all income levels.
How much disability insurance you’ll need will depend on your circumstances and your business. Your financial advisor can help you figure it out.
Ken Latus is a vice president of Insurance Solutions at Northwestern Mutual.
Running your business can feel like a round-the-clock obligation. You make all the decisions and assume the financial risks as a freelancer, consultant, independent contractor or small business owner. While being your own boss can be rewarding, it can also keep you up all night. You can feel like you’re “always on” and working 24-7. But if it’s tough to miss a single day of work, what would happen if you couldn’t work for weeks or even years?
As a self-employed entrepreneur, you have several options to help protect yourself and your business with disability insurance.
Individual disability insurance
Individual disability insurance (DI) replaces a portion of your income if you’re ever too sick or injured to work. A personal policy helps ensure your expenses are covered, your lifestyle stays intact and your financial plans remain on track.
Most households cannot withstand a sudden loss of income and still maintain their lifestyle. You’ll need cash flow to continue meeting the rent/mortgage, credit card and other bills, plus all the day-to-day living expenses. Even high-income households can be financially compromised in the long term if there’s significant loss of income that lasts months or years.
If you or your employees have group coverage, having an individual policy can still be a good idea. It can help close the gap between what that group coverage provides and your monthly take-home pay.
Insurers now provide a streamlined application process, so you’ll only need to provide some basic information when you apply for a policy. The company uses this data to determine your eligibility for coverage and the appropriate cost. Self-employed workers need to show that they earn a profit from their business as part of the application process. (If you already launched your business and haven’t taken any money out as a paycheck, proving your income is a little more complicated but won't prevent you from getting coverage.)
If you are a W2 employee and plan to start a business and work full time in your own company, you might want to purchase a policy before you make the leap—that way your income is easily verified. Just keep in mind that to be eligible for coverage in this case, the new business must be related to your current work or profession.
If you are self-employed, you may need additional protection to sustain the business if you can’t work—especially if you have employees. Your personal disability income insurance will cover your income but won’t cover losses incurred by the business.
Disability overhead insurance, for example, reimbursed fixed expenses—including salaries of non-owner employees in different occupations than yours—if you become totally or partially disabled. You can also purchase key person disability insurance to help cover the lost revenue resulting from the disability of a key employee.
There is also disability buyout insurance for the business owner. It gives your company assistance to help fund the buy-sell agreement that may be triggered when a business partner is deemed totally disabled. You can structure this policy in different ways to meet the needs of your business.
Group disability insurance
Group disability coverage is critical to your personal and business risk management. If you have one or more full-time employees, you can offer group disability insurance to provide confidence that you and your team will be protected in the event of an unexpected accident or illness. This benefit can also help to recruit and retain talented people who are vital to your business’s success.
If you own one of the following types of businesses, you can receive your DI benefits tax-free and may deduct premiums paid on behalf of staff:
- firms that are S corporations
- LLPs or LLCs that receive a Schedule K-1
- sole proprietorships
And the owners of a C corporation can elect to pay their own DI premiums with after-tax dollars so they can receive their DI benefits tax-free, while the company pays and deducts the premiums for all other employees (those employees would receive taxed DI benefits).
Medical exams and medical history questionnaires are typically not required.
As an added perk, you may be able to offer your employees the option to convert a portion of their coverage into a personally owned policy if they leave.
Short- and long-term disability insurance for self-employed people
There are two types of disability insurance: short-term disability (STD) and long-term disability (LTD). These policies work best together as STD provides almost immediate coverage while LTD has a longer waiting period before benefits begin. To maximize your income protection, consider carrying both a short-term policy, which covers you for a few weeks to a few months, and a long-term policy, which can cover you through your working years.
Short-term disability
Most disabilities that interrupt your ability to earn income are short-term but can still be financially devastating for you, your family or your employees. Without financial flexibility, maintaining your lifestyle and business during recovery can be challenging. Short-term disability (STD), usually provided by the company, covers a portion of earnings if you can’t work due to a covered non-occupational accident, sickness or pregnancy. Paid weekly, this benefit helps you keep up with your bills and living expenses for up to six months. STD coverage can be tailored to meet your company's needs.
Long-term disability insurance
If an injury or illness lasts longer or indefinitely, long-term disability insurance can help. This coverage replaces a reasonable level of monthly earnings (in most cases, around 40-65 percent of your pre-tax income),1 helping you and your employees meet financial commitments. Coordinating with Social Security and other benefits keeps the cost of LTD low. Typically, LTD starts paying benefits after 90 days of disability and can provide coverage up to Social Security retirement age, depending on the policy. The 90-day wait for LTC benefits to begin is why short-term disability insurance is also important.
Individual disability insurance
You can also purchase an individual disability insurance policy to protect against short-term or long-term income loss. Supplementing Group LTD with individual DI can maximize the percentage of income you protect, especially if you are also eligible for Social Security disability insurance (SSDI) benefits. The payments you receive will not be taxed, and you'll remain covered even if you change jobs.
Discount programs
If you have employees, discounted premium programs may be available for you to offer individual policies as an added benefit. Your involvement can range from hands-off to fully hands-on, depending on the program. This shows employees you care about their well-being and want to help them protect what they’ve worked so hard for. Premium payments can be paid by you, the employee or both.
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What’s the average cost of disability insurance?
Individual disability insurance (IDI) is generally quite affordable. In fact, the cost of a supplemental IDI policy can be less than a daily cup of coffee.2 When you buy an IDI policy, your premium is based on the options you choose, including the type and amount of coverage, the definition of disability, how soon the policy starts to pay, and how long benefits continue while you are disabled. Here are some examples of what will affect the price:
- Benefit Amount: Some IDI policies may cover up to 80 percent of pretax earnings, whereas group disability plans provide limited protection, usually covering 60 percent of your pretax earnings up to a specified maximum (typically $5,000 to $10,000 per month). (The larger the benefit, the higher the cost, of course).
- Definition of Disability: In a IDI policy, the definition of disability is used to determine if benefits are payable. Definitions vary widely by company. Understanding this definition helps you and your advisor choose the right coverage to ensure adequate protection.
- Elimination Period: The elimination period (waiting period) is the time you must wait before you’re eligible to begin receiving benefits, typically a few days to a few months after you become disabled. The sooner your benefits kick in, the higher the cost.
- Benefit Period: The Maximum Benefit Period is the longest amount of time you could be eligible to get disability benefits. Options might be from two years until age 65 or 70. Longer benefit periods will cost more than policies with shorter periods.
- Industry and Occupation: This affects the premium rates for disability insurance due to the varying levels of risk associated with different jobs. Jobs that are office based and involve less physical activity generally have lower premiums because the risk of an injury or illness preventing you from working is lower.
Medical History: Insurers will want to know about your health status, including any prescription medications you are taking, to understand if they can offer coverage. Along with your age, these details about your current health provide insight into the potential for future illness or injuries that could result in a disability.
When thinking about buying disability income insurance, consider whether the carrier offers a policy that is eligible to share in dividends and, if so, the insurer’s history of paying dividends. (3)
Disability Insurance Calculator
Get an estimate of how much coverage you need to protect your income from the unexpected.
Are self-employed people eligible for Social Security disability?
Self-employed people can be eligible for Social Security disability insurance just like employees of other companies, assuming they pay Social Security taxes and meet other qualifications as set by the Social Security Administration. The biggest difference is that employees typically pay their Social Security taxes through payroll deductions, while freelancers and other self-employed people must pay self-employment taxes (which includes Social Security and Medicare taxes) on their own when they file their quarterly estimated taxes or annual returns. Keep in mind that SSDI benefits protect only a part of your lost income.
Protect your income
Your advisor can show you the role disability insurance can play in your business plan—and your financial plan.
Get matched with an advisorCan you deduct disability insurance premiums from taxes?
The answer to this question depends on what type of coverage you’re paying for. If you’re self-employed and you pay for your own individual policy, you are not able to deduct disability insurance premiums from your taxes. But if you’re a small business owner who is funding disability insurance for your employees, disability insurance may be a deductible business expense; however, the premiums on your policy remain non-deductible.
There’s some nuance to this, though. Typically, if you’re able to deduct the cost of premiums, any benefits would be taxed. On the flip side, if you use after-tax money to pay for your disability premiums, your benefits would be tax-free.
How much disability coverage do you need?
Because you rely on your income, it’s important to protect as much of it as possible. When looking at coverage for your business and employees, there is no “one size fits all.” Each person and business are unique. A medical practice and roofing company have very different business models and risk considerations. How big is your business? How many employees do you have? What’s the true cost to the business if you or your key person are unable to work? It’s also helpful to know your monthly expenses and to think about what assets you might be able to sell if you need to get through a rough spot.
Self-employment and financial planning
Your Northwestern Mutual financial advisor can help you look at all of your needs and uncover gaps in your plan. Your advisor can ask deep questions about your goals, then help you find the right protections for you, your business and your employees. Your advisor can also help you sift through various policies and understand the differences they offer, so you’re able to make the best choice. And your advisor can help you see the big picture of how this fits into your broader financial plan and make sure you’re on track for your goals, including retirement.
Getting disability insurance right is an important step for you and your business because when all your bases are covered, you can get back to overseeing marketing, accounting, public relations, product development, research, human resources, sales, ordering lunch ...
To be used with forms MN 2024-STD and MN 2024-LTD in New Mexico, or MN 992-STD and MN 992-LTD or equivalent in other states. To be used with forms ICC16.TT.DI.IIB.(0916), ICC16.TT.DI.FIB.(0916), ICC16.TT.NCDI.(0916), ICC16.TT.GRDI.(0916), ICC16.TT.DI.PDB.(0916), ICC16.TT.DI.PDBO.(0916) or state equivalent. Not all contracts and optional benefits are available in all states. Disability insurance policies contain some features and benefits that may not be available in all states. The ability to perform the substantial and material duties of your occupation is only one of the factors that determine eligibility for disability benefits. These policies also contain exclusions, limitations and reduction-of-benefits provisions. Eligibility for disability income insurance, additional policy benefits, and qualification for benefits, is determined on a case-by-case basis. For costs and complete details of coverage, contact your Northwestern Mutual Financial Representative. Disability insurance policies contain exclusions and limitations that could affect individual coverage. For costs and more complete details, consult a Northwestern Mutual financial representative.
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life insurance, disability insurance, annuities, and life insurance with long-term care benefits)
1. Source: Miranda Fraraccio in CO for US Chamber of Commerce, Short-Term vs. Long-Term Disability: What’s the Difference? Published January 31, 2025.
2. An average Northwestern Mutual individual disability income insurance policy (Form ICC16.TT.NCDI.(0916)) with a $2,000 monthly benefit costs males approximately $25/month and females approximately $32-37/month. Typical coffee costs approximately $115/month. Eligibility for individual disability income insurance, additional policy benefits and qualifications for benefits is subject to underwriting and determined on a case-by-case basis
3. Dividends are a portion of an insurance company’s surplus that is paid back to policyowners. Money that doesn’t go to pay claims and expenses gets invested, and those earnings can increase policyowner dividends. Dividends paid on disability income insurance reduce the following year’s premium (unless you are on claim; in that event, dividends are payable in cash). Payment of a dividend on a particular policy is not guaranteed in any given year.
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