Entrepreneurs Can't Afford to Stint on Disability Insurance Illness or injury can be disastrous, especially for those living paycheck to paycheck.
By John R. McGrath Edited by Heather Wilkerson
Opinions expressed by Entrepreneur contributors are their own.
Working for yourself or running your own business usually comes with a multitude of perks and benefits -- flexible work schedules, the joy of being your own boss, the ability to explore and bring to fruition your creative passions and more. In many cases, working remotely can also be an option, allowing entrepreneurs to choose when and where they work. What this setup lacks, though, is important protections and financial security typically offered by traditional employers. Instead, freelancers and contract workers must handle the responsibilities of purchasing their own health insurance plans, setting up and managing their retirement funds, and working without paid vacation or sick leave.
Related: New Study: Health Care Is Freelancers' Biggest Concern
In today's tight labor market, many traditional employees are expecting, and receiving, higher salaries and better benefits. But what happens when you are the employee and the employer? Whether you're a freelancer with 10 different gigs, a self-employed proprietor starting out with your first endeavor or an established entrepreneur running a small business, you likely won't have access to many of the benefits that other workers may take for granted. One of the most important benefits you're missing out on? Disability protection.
People, especially young people, like to think that they are invincible. While we know this isn't actually the case, those in good health tend to underestimate their chances of experiencing a severe disability. While life, car and home insurances are often purchased without much thought -- even if they're never used -- understanding how vital disability coverage is can be more difficult, and many people hesitate to purchase it. In fact, employer-provided or not, only about one in three workers have adequate disability protection.
The odds that you will need this help may surprise you. The Social Security Administration (SSA) projects that one in four 20-year-olds will be disabled before they turn 67. And if you experience an injury or illness that puts you out of work, you may have few resources available to help protect your greatest assets -- especially if you're trying to run your own business or supporting yourself through uncertain and sometimes unstable gigs.
Related: How to Make Sure You're Paying What You Need With Health Care
According to the Federal Reserve Board's 2017 survey regarding household economics, more than one-fifth of Americans can't pay all their monthly bills in full, and nearly half don't have enough money set aside to cover a mere $400 emergency expense. This means that in the event of a serious illness or injury, a self-employed adult could easily slip into poverty, have to declare foreclosure on their home or take other drastic measures. Beyond that, a small business CEO who can't come into work can spell the end of the entire company.
While some people choose to purchase their own long-term disability (LTD) insurance plans to cover themselves for these scenarios, that can be an added cost that non-traditional workers can't afford. On average, LTD plans cost between 1-3 percent of an individual's annual salary. In addition, older individuals, smokers and those with "risky" occupations typically are offered more expensive policies.
The good news is, the federal government provides a safety net for all entrepreneurs and freelancers who keep current with their FICA taxes: the Social Security Disability Insurance (SSDI) program. SSDI is an income replacement insurance for former workers with disabilities, overseen by the SSA. It's versatile and available to everyone who meets the requirements, no matter how many companies they are employed by. Small businesses can call upon programs like Extended Benefits, which is free to all employers without private disability coverage, to provide this valuable resource for their workers to utilize in the event of a disability.
Typically, to be covered for SSDI, workers must have paid FICA payroll or self-employment taxes for five out of the last 10 years. Work history, education, age and mental or physical conditions can all impact the SSDI process and its outcome, but the bottom line is, this benefit is available and already waiting for you, no matter your financial resources or whether you have access to traditional benefits.
Related: Freelancers Will Soon Be Able to Buy Short-Term Disability Insurance Through This Startup
No one wants to think about something bad happening to them, such as a health emergency or disability, or a threat to their financial and physical property. After the unthinkable happens, those entrepreneurs who choose to access disability protection can discover a silver lining while going through a very difficult time. Are you an entrepreneur who is prepared for the unthinkable?
