Millions of Americans now earn a living in ways that disability insurance was never designed to cover. The policy language that determines what counts as income when a claim is filed was written for a simpler days, when workers got their paycheck from a single employer.
In those days, active income and passive income were different concepts. For the growing class of freelancers, creators, consultants, and hybrid earners who dominate today’s labor market, that language is quietly working against them.
The problem is not that disability insurance fails to pay. The problem is that it pays based on a definition of monthly earnings that was drafted long before a marketing consultant could also run a Substack, license a course, collect affiliate commissions, and drive for a delivery platform between client calls.
What qualifies as earned income under a standard disability policy and what actually arrives in a modern freelancer’s bank account are increasingly different things.
What the Policy Language Actually Says
A standard own-occupation disability policy, like the Ameritas DInamic Foundation form which I reviewed, defines monthly earnings as wages, fees, salaries, bonuses, commissions, pension and profit-sharing contributions, and other payments for services performed, minus whatever business expenses you had performing those services. That definition is actually much broader than you might expect. So it captures a lot of what a solo practitioner or independent consultant earns.
But the same policy explicitly excludes royalties, rent, annuities, interest, and dividends. It also excludes sick pay, benefits received under a formal wage continuation plan, and, critically, any other form of unearned income.
So for previous generations, that exclusion was academic because professionals kept their income streams clearly separated. Today it is anything but academic.
A 2025 survey cited by Financial Times columnist Rana Foroohar found 5.6 million Americans earning six-figure incomes through gig work, like driving Ubers and walking dogs, alone. A Federal Reserve report using 2024 data found 22 percent of US adults engaged in some form of gig activity. The income those workers generate does not arrive in neat, employer-issued packages.
Consider a mid-career marketing consultant who was laid off from a firm and went independent. She bills clients directly, which qualifies as earned income under almost any disability policy. She also earns revenue from an online course she built two years ago, royalties that now arrive monthly without any active work on her part. She collects affiliate commissions from tools she recommends in a newsletter. She rents out a room on a short-term platform. If she becomes disabled tomorrow and files a claim, her insurer will calculate her prior monthly earnings based only on the active, services-rendered portion of what she makes. The rest disappears from the calculation entirely.
The consequence is a benefit that replaces a fraction of her actual living expenses, not the income she was counting on.
Why The Gap Is Growing
Foroohar’s analysis in the Financial Times points to something structural happening in the American labor market, not a temporary disruption. New business applications recently reached an all-time high, driven partly by laid-off white-collar workers converting their skills into independent practices, and partly by the collapse of traditional employment ladders for younger workers. As TS Lombard managing director Steve Blitz noted in commentary cited by Foroohar, social media has lowered the barrier for selling, virtual tools have made professional services easy to deliver independently, and the line between employee and consultant has become genuinely blurry.
The income streams that follow from that blurriness are exactly the ones that standard disability policy language excludes. A consultant who licenses her methodology to other practitioners generates royalty income. A writer who built an audience during a corporate career and now monetizes it through subscriptions generates what insurers classify as unearned income. A financial professional who earns dividends from a business ownership stake generates income that disappears the moment a claim form arrives.
None of this reflects bad faith by insurers. The exclusions exist because unearned income, by definition, continues whether or not the policyholder can work. Royalties still arrive when you are hospitalized. Rental income does not stop because you cannot perform surgery. The policy is designed to replace lost earning capacity, not total household cash flow. That logic is sound. The problem is that for a growing share of the workforce, earned and unearned income are so deeply intertwined that separating them produces a number that bears little relationship to what the person actually needs to sustain their life.
What Freelancers Need to Understand Before They File
The earnings definitions in a disability policy are not just technical language. They are the architecture of what gets replaced. For professionals with hybrid income, reviewing those definitions before a disability event, not during one, is the only way to understand what coverage actually exists.
A few specific areas deserve attention from anyone earning income across multiple streams.
The policy’s prior monthly earnings calculation uses the higher of the 12-month or 24-month average preceding the onset of disability. For freelancers whose income fluctuates significantly year to year, which year gets averaged matters enormously. A consultant who had a strong year followed by a leaner one may find her benefit calculated against a blended average that understates her normal earning capacity.
The accounting method election, cash versus accrual, is another decision that many policyholders never make consciously. Income earned but not yet received at the time of disability is excluded under the cash method. For consultants with outstanding invoices at the time of a disabling event, that distinction can produce a meaningful reduction in the benefit calculation.
Finally, the passive income exclusion rewards planning before disability, not after. For freelancers who are building royalty income, licensing revenue, or investment income alongside their active practice, structuring that income clearly, and ensuring that active income documentation is clean and well-supported, gives the insurer and the policyholder the best possible foundation for an accurate benefit calculation.
The broader income protection landscape for self-employed and gig workers is covered in more depth across this site’s resources on disability coverage for independent professionals.
The American labor market is not going back to the model that disability insurance was built around. The question for millions of freelancers is whether their coverage has kept pace with the economy they actually work in. For most, the honest answer requires reading the policy language more carefully than they ever expected to.