By Phaedra Hise

The Big Diss: Independent Professionals and Disability Insurance

There it is again. That dull ache in your arms that has been getting worse each morning. It runs along your arms, down to your tender, tingling thumbs, which are almost useless now at the keyboard. The diagnosis of early Carpal Tunnel Syndrome wasn't so scary when the doctor told you that wearing wrist guards and cutting back on typing might make it go away. But this week a client report is due, along with two bid proposals for important projects. No new bids, no income next month. You massage your aching wrists, look at the pages of handwritten notes to be typed up for the bid, and think about the mortgage. Maybe it's time to check out disability insurance?

Good luck.

Disability insurance is the toughest kind of coverage for independent professionals to secure, say underwriters. Basically, it's because IPs refuse to trot into an OSHA-approved cubicle each day. There just aren't enough established parameters about where, when, and how self-employed professionals work. That makes it extremely tricky to define whether or not they're unable to do their jobs.

Despite this, Dave Burns, a self-employed marketing consultant in Los Altos, California, had no trouble getting disability insurance when he applied in 1993. "I called three or four companies, everyone was willing to meet me and offer a quote," he says. Burns doesn't realize it, but he was the belle of the insurance-company ball. Everyone wants to dance with the healthy, white-collar, mid-six-figure-income professional. It's the sweaty landscape designers, penniless writers, and knife-wielding caterers who still have empty dance cards.

Here's why: The big insurance companies want to stay in business. To make a profit, they rely on actuarial tables to tell them what kinds of people are "insurable." The tables show that they can offer life insurance to, say, a hundred 30-ish women who don't smoke because so few of those women will make claims. The rest just quietly pay the premiums, making those hundred policies very profitable. The caterer? Likely to cut her finger off. Landscape designer? Might twist his ankle in a garden bed. Writer? High risk she'll make a claim in order to earn a regular salary.

Insurance companies got burned by claims in the mid-1980s. Then, disability was a new (and profitable) product. Insurers offered very cheap and comprehensive coverage to white-collar professionals, including quite a few doctors. But once HMOs began crunching into medical profits, the doctors began filing disability claims. Who knows better than a physician how to prove, medically, that he or she can't do the job? Insurance companies paid one claim after another -- most of them for lifetime full-income replacement, then stopped offering disability altogether.

Today, disability coverage for the self-employed is making a small comeback as insurance companies realize that self-employment isn't just a fad, but an increasingly rich worker niche. Insurance companies are struggling to find ways to offer profitable coverage. They're crunching the numbers in the actuarial tables, reaching for those tempting, high-income computer programmers, marketing consultants, computer networking advisors, and business management consultants.

Even so, coverage for home-based professionals individuals is still offered by only a handful of nervy market leaders, including Unim-Provident, Aquent, Guardian Disability Brokerage, Northwestern, and Illinois Mutual. Because they've been burned before, they are particularly neurotic about nailing down definitions of things like "workplace" and "disabled" and time spent in the house. That means it's still tricky to get a policy if you're self-employed.

Few who have filed claims or been refused for insurance will talk about it on the record. One self-employed advertising copywriter was turned down for coverage because she had taken anti-depressants within the previous year. Although she had been off medication for nine months, her agent told her it would be two years before she could get coverage. Other professionals tell stories of being turned down for claims that just couldn't be proven, including "sick building syndrome" and seasonal affective disorder.

At the core of the problem lies the definition of the term, "disabled." Wage slaves are usually considered disabled when they can't make it in to work. But what if your office is right over there by the master bathroom door, and it consists of a cordless phone and laptop computer? Well, then you start splitting hairs over what the job actually entails. Do you spend most of your workday in the house? Okay, maybe you don't have to be able to get out of bed to do your job. Can you make phone calls? Can you talk to computer dictation software? Okay, baby, you're good to go.

In attempting to define what home-based professionals actually do, underwriters (the office clerks who issue the policies) usually rely on their own detailed job description data. It tells them that a CPA, for example, uses her hands for manually calculating equations. But what if you earn most of your income instead by generating cerebral analyses? Nobody's going to know that unless you tell them. You need to document the details of your particular job, working closely with your insurance agent (the person who applies for the policy).

If you've got a vague job description, rewrite it. "The more specific a person can be on defining job duties, the more likely they are to get coverage," says Steve Crawford, president of Guardian Disability Brokerage. List the exact duties your job entails. Rank them by what percentage of time you spend on each one. At a glance, an underwriter can see clearly what kind of injury would knock you out of the workplace, and is more likely to offer coverage.

The whole thing would be so much easier if you just got out of the house a little more, say insurers. Spending more than 50 percent of your time working in the house is probably the single biggest red flag to underwriters. Some simply won't cover people who work 100 percent from the house -- a designation that can include writers, editors, graphic designers, and Web-site designers and managers. The reason? Working out of the house makes you look more like a wage slave, in the insurance company's eyes. It becomes much easier to define "disabled" because if you can't make it to a client site, well, then you can't work.

It's difficult, but home-based workers can find disability insurance. Larger insurance companies are more likely than small ones to offer policies, and the key again is to document the job. For each completed contract, or job, list what percentage of time was spent on each duty -- telephone interviews, computer research, meeting with clients, typing up reports, filing documents. Then the underwriter can attribute an income stream to each task. Even though you're in the house all day, the underwriter knows exactly what you're doing, and is more comfortable insuring you against being unable to do it.

"Disability is probably the hardest thing to get," says Dave Burns' insurance agent, Richard Geno at Principal Financial Group Insurance. Dave Burns was an atypical applicant, Geno admits. "He was an ideal candidate. He had great health, good income, and a good occupation class."

The higher the occupation class (defined by the risk of injury and level of income), the less likely you are to file a claim. Higher classes get lower premiums. To protect a yearly income of $100,000, a low class 3 will pay $2,800, versus $1,900 for a high class 6. Payout terms might also be shorter for a lower class -- five years, say, instead of "to age 65" or the person's entire lifetime.

Steve Crawford's insurance company specializes in disability coverage, and he says, "We deem higher income as a better risk because you're going to want to go back to work sooner. You'll be dissatisfied making only half your income [on a disability claim]." Most companies won't offer coverage to people making less than $16,000, Crawford says.

High risk of injury is one thing that knocks home-based professionals into the lower classes, according to Peter McCann, president of Aquent Insurance. "Job sites are overseen by OSHA," he points out. "A money manager in a broker's office can focus on the job. He stands up to walk to the printer, and the path is clear. But at home, you trip over your son's toy, your mind is half on what you should be doing around the house." A steel worker, McCann says, might be at risk, but at least it's clearly defined how the injury applies to the job. Not so for the Web designer who just tripped over his kid's Tonka truck. Sprained back? Tough luck, get a brace and get back to that keyboard.

Boosting yourself into a higher class is the way to win coverage. You've already organized and documented your job duties, now it's time to neaten up the office. "I've seen agents send in photographs of the office," says Steve Crawford. Draw a diagram to show that the copier is within easy reach, with nothing cluttering your work paths. Agents use information like this to humanize applicants, so that the underwriter sees them as people, not just one of 40 of the day's paper piles. "The more comfortable the underwriter is with the person, the more likely they are to offer coverage," Crawford says.

Burns' excellent coverage kicks in if he can't perform his particular job, which is the best (and most expensive) type of policy to get. More likely, you'll get coverage only if you can't perform any job. Say you're a CPA who does company financial statements. You broke your hand? Well, you can generate some income from performing more cerebral business analysis so the insurance company isn't going to pay much disability. You don't want to be an analyst? Tough luck -- income is income.

Fluctuation in income is another hazard of being self-employed, but most insurance companies have already figured a way around that. Just show a few months' worth of contracts and pay stubs to give an idea of what you earn. You'll probably get a policy that would replace part of your income. Once you have a tax return, the coverage amount will be adjusted, eventually to reflect a three-year income average. Most policies include the option to buy more coverage if income increases markedly. If your income goes down, resist the urge to decrease your disability coverage amount, says McCann at Aquent Insurance. Raising it is difficult, since insurance companies usually increase coverage in spurts, only after lots of documentation of the improved income.

"If you're in a classification that an underwriter really wants to write, they can bend the rules," McCann admits. If you're not, agents can work hard to make you look like someone an underwriter wants. McCann suggests finding an agent who has a few million dollars of policies with one insurance company. That agent can lean on the company to squeeze you in. Document your job description, your office, your income, and send in a photo of yourself. Smiling.

Perhaps you haven't made the leap to 1099-land yet. In that case, plan ahead and follow the example of one self-employed editor who has a neurological disorder. She secured disability coverage before she quit her corporate job, and then adapted the policy once she became self-employed. "It's expensive as hell," she says. "But I've got to have it."

We'd love to hear your comments about this article!

Phaedra Hise is a freelance writer who lives in a state of bliss. If you like, we'd be happy to put you in touch with her, or with any of the other IPs named in this article.