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If you're venturing into the world of self-employment, you may need to recreate some of the benefits you enjoyed as an employee. That could mean finding your own health coverage, setting up your own retirement savings and buying life insurance that protects your family and squares away your business liabilities if you pass away.
Buying life insurance as a self-employed person doesn't have to be unduly complicated. Size up your needs, choose the type of insurance you want, shop online and apply for the policy that fits you best. Here's a step-by-step to get you started.
1. Assess How Much Coverage You Need
Start by taking stock of any life insurance coverage you already have, your family's financial needs and any additional coverage you want for business expenses or debts. You need enough coverage to safeguard your family and pay your business liabilities without overpaying.
- How much life insurance do you already have? Factor in any insurance policies you already carry, including life insurance with a current employer if you're still working a job with benefits. Life insurance with past employers may not continue once you leave the job, so check your policy's terms to be sure.
- How much coverage does your family need? Do a detailed dive using the DIME method, which accounts for your debts, income, mortgage and education to estimate the amount of insurance you need. Alternatively, many experts recommend setting your benefit at 10 to 15 times your annual income. If your self-employment income fluctuates, or you're just starting out, consider averaging your annual income from the past five years or using average income data for people who do similar work.
- Do you need additional coverage for business debts and expenses? If you're a self-employed enterprise of one, you may not have extensive operational expenses and debt. But you may want to add coverage that will pay off your business credit cards, the loan on your delivery truck or business equipment, outstanding invoices from fellow contractors, and regular expenses like rent and utilities. Increase your allowance for operational expenses if you're hoping to keep the business running while a new owner (or buyer) steps in.
2. Choose a Type of Life Insurance
There are two main types of life insurance that self-employed people choose between: term life insurance and permanent life insurance.
Term Life Insurance
True to its name, term life insurance covers you for a certain number of years, often 10, 20 or 30 years. If you die within the coverage term, the life insurance company pays a death benefit to your beneficiaries. If you live beyond the policy's term, your policy expires without paying out any money.
Term life insurance is generally less expensive than permanent insurance. When the policy ends, you may have the option of renewing, though your premium may go up if you do. You can also have more than one insurance policy if you like. You can add coverage with a second policy and set it to expire when it's no longer needed—for example, when your equipment loans are paid off or your kids are through college.
Permanent Life Insurance
Permanent life insurance has no expiration date: It stays in force as long as you continue paying your premiums. Permanent life insurance may include whole life policies, universal life policies and variable life policies. Permanent policies use a portion of your premiums to accumulate cash value. You can borrow against your policy's cash value while you're alive, though any unpaid loan amount left over when you die may be deducted from the death benefit.
Permanent insurance is typically more expensive than term insurance. Self-employed people may find it helpful to have cash value to borrow against or tap during income fluctuations. However, if you already have retirement and investment accounts, using your life insurance to invest may be redundant. Consider your needs: A less expensive term policy that covers your family during the critical child-rearing and college-planning years may be sufficient.
3. Compare Quotes
You can get quotes by contacting individual life insurance companies directly or by using an online search tool that provides multiple options at once. Whichever way you go, try to get a variety of quotes so you can compare costs and benefits widely.
In addition to your premium price, look into each insurance company to learn more about their financial health and customer service ratings. Consider whether working with a qualified insurance agent would be helpful: They may be able to assist you in calculating your coverage needs and choosing the right type of policy, as well as navigating the application process.
4. Choose a Provider
Review your options and choose the policy and provider that fits you best. You may be able to complete your life insurance application online, though some companies require a phone call or in-person meeting with an agent. Be prepared to provide basic information, including:
- Social Security number: The insurance company may use this information to run background checks.
- Proof of identity: Your driver's license, passport or birth certificate also verifies your age.
- Proof of residency: This can include a rent receipt, mortgage statement, property tax bill or utility bill.
- Proof of income: If you're self-employed, a recent tax return or bank statements can often stand in for pay stubs.
Your life insurance application may also require health information, medical records and/or a medical exam. The insurance company may use this information to help calculate your premium or to approve or deny coverage.
Frequently Asked Questions
Life insurance costs vary depending on the type of insurance, amount of coverage and policy term (for term life insurance). For reference, a 10-year, $1 million term policy costs an average of $504 per year for a 35-year-old female nonsmoker and $600 per year for a 35-year-old male nonsmoker, according to Insure.com.
Factors that also may increase the cost of your premium include:
- Age: The older you are when purchasing a policy, the more insurance costs.
- Gender: Women typically pay lower rates than men.
- Health: Chronic or severe health issues may raise your premium, as they increase your chances of dying while the policy is in force.
- Lifestyle risk: A high-risk occupation or hobby may increase your costs due to risks of premature death.
- Policy type: Whole life and other types of permanent insurance policies generally have higher premiums than term insurance.
In general, you should expect to provide income information as part of your life insurance application. Insurance companies review your financial information as part of an overall risk assessment. They may limit the amount of coverage you qualify for based on income, for example, capping your benefit at 20 to 30 times your annual income. They may also use a credit-based insurance score to help determine your premium.
For most freelancers and gig workers, life insurance is not tax-deductible. The IRS considers life insurance premiums to be non-deductible personal expenses.
If you own a business that offers life insurance as an employee benefit, life insurance premiums may be deductible as a business expense. However, neither you nor your company can be a beneficiary on the life insurance policy to qualify for the deduction.
The Bottom Line
Going without life insurance could leave your family and heirs vulnerable. Not only would they face personal financial hurdles if you were gone, but they could end up needing to use money from your estate to pay off business expenses and debts. Take the time to map out your life insurance needs, shop around for the best policy and get coverage for your family and business now. If your business—or your family—grows, you can always add coverage or an additional policy to reflect your changing needs.