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Self-Employed and Disabled? Your Disability Policy is Not What it SeemsIf you own a small business and you become disabled, getting your disability insurance company to pay you can be extremely complicated. Why? In part because most disability policies insure you for loss of income, and not for the disabling condition itself. (We call this the “Stephen Hawking” clause…clearly Stephen Hawking had a disabling condition, but he just as clearly suffered no loss of income because of it. If he had a disability insurance policy, they probably would not have paid benefits.)

For the average employee, this is a distinction that does not really matter. If you are disabled and cannot work, you suffer a loss of income and your disability policy (in theory, anyway) will cover you.

How Disability Insurance Companies Treat Small Business Owners

For small business owners, however, the picture can be very, very different. In some cases, your disability insurance company may not pay at all even if they agree you are disabled and know you are no longer working in your business. In the worst of the worst-case scenarios, they will pay benefits and then demand all that money back after taking a look at your tax returns.

And the Court lets them do this.

We get it: if you own a small business and work in your small business, your “life plan” is to work and grow the business. A serious illness or injury can unexpectedly derail that plan. You’ve been paying for a disability policy for years, and now that you are disabled, you trust that your policy is going to pay. But you may not be aware of how the policy calculates “income” for their “loss of income” purposes.

If you withdraw money from your business or otherwise take a distribution, your policy and your disability insurance company probably considers this income. They don’t care that you are disabled. They don’t care that you are now using the safety net you specifically bought this policy to protect. They see income reported on your tax return and bam – if they paid you disability benefits, they want their money back. They will claim that your claim is overpaid and you owe them reimbursement. And the policy wording often supports their position.

So if you are a small business owner and disabled, it matters what you do with the proceeds from your business. It matters whether you take a distribution, and it often matters when you take a distribution.

You need to be an expert on all the ins and outs of your policy. Where to start with that? Call us at (703)-584-7277. We offer a one-time consultation to review your policy and discuss your specific situation. We can advise you on what to look out for, what your reporting requirements are, and more. If you need to appeal an insurance company denial at any point, we will credit the cost of the consultation to the appeal fee.

Don’t wonder and worry whether the insurance company will pull the rug out from under your legitimate disability claim!

Ben Glass
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Ben Glass is a nationally recognized ERISA disability & life insurance attorney in Fairfax, VA.