Buying short-term disability insurance when self-employed is tricky.
The best coverage is available through large groups. The insurance company can pool risks with others. Pooling allows for lower premiums, better benefits, and easier qualifications.
Individual coverage usually means higher premiums, fewer benefits, and stricter criteria.
There are several middle-ground opportunities worth exploring.
Two government programs may help self-employed people. Independent 1099 contractors can buy group coverage in some cases. Small business owners who pay at least two workers may qualify for group coverage.
Government Disability Insurance
Government-sponsored disability insurance is the ideal insurance for the self-employed. Federal and state agencies pool the risks of millions, spreading the cost of claims.
The coverage is most affordable with government involvement.
State Programs
State-sponsored short-term disability is the best choice for self-employed people in certain states. State programs cover millions of workers, resulting in low premiums, rich benefits, and easy qualifications.
Ten states require W2 employees to buy temporary disability through payroll taxes. These workers automatically have coverage and do not need to show evidence of good health. Everyone qualifies.
Independent 1099 contractors and sole proprietors can buy state temporary disability but must enroll themselves. It is not automatic.
Contact your state agency if you work in California, Connecticut, Colorado, Hawaii, Massachusetts, New Jersey, New York, Rhode Island, or Washington.
Social Security
Social Security disability insurance (SSDI) covers the self-employed automatically. The federal government requires them to pay premiums. The self-employment tax is 15.3% and consists of two parts.
- 12.4% for Social Security
- Old-age retirement
- Disability insurance
- 2.9% for Medicare
SSDI pays for temporary disabilities lasting twelve months or longer. SSDI pays for disabilities lasting twelve months or more. The benefits are negligible and start after a five-month wait.
The main advantage of SSDI is that most people have coverage, so pre-existing conditions are not an issue.
Group Disability Insurance
Employer-sponsored short-term disability can be a good option for some self-employed people. Groups covering many workers have lower premiums and better benefits.
As a licensed agent with Colonial Life, I helped many independent 1099 contractors and small business owners get group coverage. Other insurance companies may have similar rules for forming a group.
Independent Contractors
Large employers offering voluntary short-term disability sometimes allow independent 1099 contractors to participate. The organization withholds the premiums from their pay and forwards them to the insurance company every month.
This model works well in many industries with 1099 independent contractors.
- Mental health therapists
- Per Diem nurses
- Real estate agents
- Freelance graphic designers
Small Business Owners
All self-employed people are small business owners. Many can buy short-term disability insurance if they regularly pay at least two other workers. The other workers could be W2 or 1099 employees.
Colonial Life requires three workers to buy at least one supplemental insurance policy. They must also pay the premiums through payroll deduction to form a group. The small business owner counts as the first of three.
For example, a mental health clinic owner could buy short-term disability if one therapist buys cancer insurance and another buys accident insurance.
Individual Disability Insurance
Short-term disability insurance for individuals is the last resort for self-employed people. Premiums are higher, benefits are worse, and guidelines are stricter when insuring one person instead of a group.
Maternity Leave
Poor maternity leave benefits make individual short-term disability less ideal for self-employed women. These policies do not cover the main reason female entrepreneurs seek coverage.
Individual policies bought outside of employers do not cover normal childbirth. Women will have no income protection for six to eight weeks while recovering from labor and delivery.
- Six weeks for vaginal birth
- Eight weeks for C-section delivery
Higher Premiums
Higher costs make individual short-term disability less attractive for the self-employed. Premiums are higher without a large group to pool risks.
Request a quote based on your needs and connect with an agent licensed in your state. Expect higher premiums overall, but remember that you control three levers dictating costs.
- The elimination period: how quickly benefits begin
- The benefit period: how long claims payments last
- The benefit amount: how much the policy pays monthly
Stricter Criteria
The self-employed have more difficulty buying coverage as individuals. Insurance companies use strict criteria to avoid adverse selection when they can’t pool risks with others.
The insurance company will deny coverage to individuals who cannot show evidence of good health. Expect to answer detailed questions about your medical history.
Adverse selection happens when one party, the applicant, has more information about risk factors than the insurer. For instance, many people wait until sick to buy short-term disability insurance.
Don’t be that person. Act before it’s too late.
