If you're in business for yourself, either alone or with just a few employees, a long-term disability can easily mean bankruptcy or could even shove you into homelessness.

The only way to protect yourself from these possibilities is with disability insurance. But there are three types and you need to know the differences.

The kinds of disability insurance

There are three kinds of disability insurance available. The first of these is Own-Occupation Disability Insurance. This is the only type of insurance that does not penalize you for going back to work in a different occupation while on a claim.

Why can this be important? If you become disabled and are like most people, you not going to want to just sit around the house for many months. So, with this type of insurance, you could go back to work in some job where you are not totally disabled.

The second type of disability insurance is called Income Replacement Insurance. This has become the most common type offered by insurance companies today. This type of insurance will penalize you during a claim if you decide to go back to work or earn another source of income.

The penalty usually takes the form of a decreased monthly check as the insurance company will offset some of what it owes you based on your other income.

The worst definition

The third type of disability insurance is Gainful Occupation Coverage. This is the worst kind of disability insurance because it defines disability as "because of sickness or injury, you are unable to perform the material and substantial duties of your occupation, or any occupation, for which you are deemed reasonably qualified by education, training or experience.

The problem with this definition is that it is too subject to interpretation. What you think you are reasonably qualified to do by education, training or experience could be far different from what the insurance company thinks. It's doubtful the insurance company could decide you're qualified to go back to work flipping burgers but, at least theoretically, this could happen.

If you're in business for yourself, you need disability insurance. But don't make the mistake of buying the cheapest available. Shop around before you buy to make sure you're getting the best value. You might find you can afford the Own-Occupation Disability Insurance and that's, by far, the best option.