Self Employed? The First 2 Things You Need to Know About Disability Insurance

The world of self employment is as rewarding as it is challenging. Whether you’re a freelancer, contractor, or business owner, as an advisor, it’s important for to have detailed conversations about the challenges you face so we can manage risks. One area of concern for self-employed individuals is the inability to work due to an accident or illness. So let’s talk about disability insurance.

Disability insurance is vital for the self-employed because for the most part, if you’re self employed and you’re not working, then you’re not making any money. It’s one of the distinct disadvantages for self employed people, as most employees will normally have coverage under a group benefit plan for disability. Self-employed individuals need to consider how much coverage they should get, and the costs, so they can have a proper plan in place for a would-be disability event..

It’s important for us to help our customers plan for anything. So let’s get started.

1. Coordination of Disability Insurance Benefits

Self-employed individuals may have some disability coverage through government programs, such as the Canada Pension Plan (CPP), Employment Insurance (EI) and Workers Compensation (WCB). However, it’s typical that a self-employed individual may not be regularly paying premiums toward EI or WCB, which would normally mean these programs will not pay for a disability event. CPP will pay a disability benefit, but only where the disability is “severe and prolonged”, and only then for an amount that is generally under $1,500 a month.

Therefore, let’s have the conversation so we don’t count on the government when the government might not necessarily be able to offer much help.

When we’re working on a disability portfolio for a self employed client or business owner, it’s important for us they understand that disability insurance operates on a balance of responsibility. Coordination of benefits ensures people who receive income from other sources during a disability (such as CPP) aren’t collecting again from another program (such as EI). The truth is that few would do this willingly, but it’s important that an individual understands disability programs often work within coordination: where some programs pay first to the disabled, without question; and others paying second to the disabled. The second payor will assess what the first payor has paid, and will only top-up (as applicable) any disability benefit to an individual.

Coordination attempts to ensure that no one under a disability can be put in a better financial position by collecting more disability benefit then they did when they were working, simply by having several different sources of disability coverage. Therefore, it’s important to understand your disability plans within your portfolio, specifically regarding who pays first and who pays second.

2. The Waiting (or Elimination) Period

Let’s say you’ve been stricken with an illness and you’re unable to operate your business. Your restaurant, your construction company, your home office – the waiting period is the amount of time you have to sit tight before your disability payments begin. Also referred to as the elimination period, premiums are more expensive the shorter the period.

So, the first lever we maneuver in a disability insurance policy is how long we can wait until we need the disability benefit to start – the longer we can wait, the more inexpensive the monthly premium will be.

I realize it’s a bit ironic that the first two things you need to know about disability insurance are its limitations – but these two factors build stability into the system. They let everyone buy these products wth confidence that the system isn’t being taken advantage of.

In two weeks:

When it comes to the Own Occupation definition, this states that you’re disabled if you cannot do your specific job, the one you were doing before you were injured or disabled.

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This post was written by Marco Faccone