The personal part of this story is that I have had more than an average share of injuries and accidents. Some were my own doing; I remained highly competitive in the physically punishing sport of international style wrestling until age 41; well past the age that more prudent athletes would have retired. This resulted in a string of broken body parts, a resume of orthopedic procedures and business interruptions. Seperately, I was hit by negligent drivers twice as a pedestrian and three times on bicycle. Each instance was one of those types of accidents that there was no way I ould see it coming or could have avoided it.

 

The first time I had a disability income claim the insurance company hired a big 8 accounting firm (yes I know this dates the claim) to audit my business records and prove that I earned more while lying in the hospital than I did when I was working. I was just getting started in my own practice and I spent about a third of my gross receipts on building the business - That seemed like a natural occurrence to me – with or without a CPA firm’s report. I had stopped my marketing, and laid off my part-time staff. I was not spending money on dining and client entertainment (a biggie for me) and postponed paying a number of other expenses. Meanwhile the payment checks for prior services continued to come in so,  at least on a cash basis accounting method, I was earning more than before the accident. The insurer denied my claim on the basis of no loss of income. Yet a year later, when I had lost about 75% of my clients and the checks had dried up, I was no longer physically disabled and therefore not entitled to any benefit. I was back to work in about 12 weeks but eventually lost most of my clients anyway due to the nature of the face to face service I provided. I learned that a short term disability can do far more damage to a small business than the loss of 12 weeks’ worth of earnings.

 

I used to carry a supplemental business overhead insurance policy but cancelled that when I moved to a home office. The nice thing about that type policy, as I understood it, was that no proof of loss of income is necessary. The downside is that only certain business expenses, and not your income, are insurable. It was difficult to show insurable expenses when I worked from a home office. I understand that few companies offer this coverage but would be interested in hearing from other advisors on this topic.

 

Most recently, I was disabled near the end of the calendar year and had to cancel a number of service contracts with clients. Some required me (or I voluntarily offered) to repay fees that I had already collected. There were also other extraordinary costs in closing down the business. As a result, my results changed from being one of my best years ever (for the first 11 months) to being one of my worst years ever when looking at the net taxable income on the tax return for the entire year basis. In addition, I arranged some year-end non-cash tax planning transactions to further reduce tax liabilities. So you can guess what is coming next. The DI carrier wants to base the benefit on the net taxable income for the entire year rather than the eleven month period before the accident as I stated it. It seems blatantly unfair to me. Their argument is that there is no independently verifiable and recognized record of operating results of a sole proprietor’s business other than the income tax return. I see their point. The opportunity for insurance fraud by self-employed people would be significantly greater without relying on the tax return. In any event, the specific method for determining insurable income (and basis of benefit) is of critical importance to any self-employed person considering disability income insurance.

 

Just like most other financial advisers, my clients tend to be a lot like me. They tend to be self-employed, in a similar age range, have active and often risky hobbies and diverse business accounting practices that are designed to minimize taxable income. All of us face similar financial risks from the loss of income in the event of accident or extended illness. From time to time I discuss the concerns of self-employed persons with disability insurance company representatives and usually come to the conclusion that the products available do not address our real risks and concerns. I have not heard any news from the industry in the past several years.

 

I think that as a financial adviser, unless I actually believe in a product and would use it myself, I have no business recommending it to clients. This is the case with disability income insurance.

 

What are your thoughts and experiences with disability income insurance for self-employed people?