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Disability Insurance as an Independent Contractor

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  • Disability Insurance as an Independent Contractor

    Interesting situation.  I have a really good job, with really good pay, and just became a partner.  I am also a medical director, and local region medical director, both positions of which pay me a stipend aside from my full-time ED pay.  All of my income is 1099 to my passthrough S-corporation.  I have a very good accountant.

    My pay has now doubled, but my taxable personal income (after deductions, retirement, etc) is little changed from where it started.  My financial Planner, whom I only use for my disability policy, recommended I ask for the maximum benefit for my state, which is $25,000 per month.  I currently have true own occupation coverage with Mass Mutual, and have applied for an additional policy with Principal to total the maximum benefit (stacked).

    My benefits are apparently calculated on a net income basis (after taxes).  Is there any consideration for the business expenses I write off as a result of my total 1099 income?  These are substantial and, since they are corporate, I am afraid that I may not qualify for coverage due to my independent contract status with a passthrough corporation.

    Essentially, if I become disabled, I will lose all of my income, my stipends (because I am required to practice), and my partnership status/bonus.  I would lose everything, including my pre-tax expenses and lifestyle, and I am concerned I would only qualify for a benefit comparable to my personal net after business deductions and expenses (post-tax income).

    Does anyone know if disability benefits consider total income in situations with passthrough corporation, or are they relegated strictly to personal net income?

  • #2
    Most carriers will issue $15,000-$17,000 month on their own. When you combine carriers, you can potentially reach $25,000-$30,000 month, depending upon your earned income and other disability insurance inforce.

    Certain companies like MetLife and Principal do make concessions for self-employed business owners. MetLife will allow you to take your "net" income (this is after expenses but BEFORE taxes) and add 20% in order to determine the amount of additional individual coverage available. Principal will also do the same but the maximum additional monthly benefit available via this Business Owner Advantage is $2,000.

    The income that you can count as insurable would be your W2 (box 5) plus your distribution.

    If you believe that you are limited by the amount of coverage that the carrier will offer ($25,000 month), you may qualify for more by going to another carrier if your income would warrant a higher monthly benefit. You can also potentially add a Catastrophic Disability Benefit (CAT) Rider to your coverage. This can provide $8,000-$12,000 month of additional coverage in the event of a catastrophic disability (if the rider is available in your state).

    If you are making contributions to a 401(k), SEP or Profit Sharing Plan, you can potentially insure those contributions as well.

    Finally, Lloyd's of London will insure you for up to 5% of your "net" earned income (minus the other coverage that you have inforce).

    Hope this helps.


    Lawrence B. Keller, CFP, CLU, ChFC, RHU, LUTCF