Life Insurance for the Self-Employed
Going out on your own professionally has become the go-to career move. An estimated 57 million Americans are freelancing – about 35% of the country’s workforce – and the gig economy is growing more rapidly than ever.
Whether you’re starting your own business or taking a break from the corporate world to freelance for now, being your own boss means taking care of things you may have once counted on your company for, like health insurance – and life insurance. The good news? There are plenty of life insurance options available for the self-employed.
Why individual life insurance coverage matters
Life insurance was once a standard perk from employers, but fewer companies are offering it now. Of all the people in America with life insurance, less than half (45%) are covered by group life insurance.
Group life also comes with some limitations. You usually can’t take your insurance with you when you switch jobs, and the group coverage caps are often less than what most people need. Plus, healthy people can end up paying more for a group plan than individual coverage.
Your family counts on your income, and life insurance is there to protect them financially in case something happens and you’re not there to provide for them. As a business owner, you might also have partners or employees depending on you, as well as company debts and expenses.
If you die while the policy is active, the insurance company provides a cash payout to replace your income, cover the mortgage, pay off credit cards, pay business debts, and more. Whether you’re planning to be self-employed temporarily or permanently, it’s probably a good time to consider an individual policy.
Is life insurance tax-deductible for self-employed workers?
The IRS doesn’t generally count life insurance as a required business expense when you buy a policy to protect your family. But there are a few scenarios that allow you to write off life insurance premiums at tax time:
- If you own a business that hires employees and offers life insurance as part of a benefits package, you can list those premium payments with other business expenses on your Schedule C form.
- If your business takes out a key person policy on a partner or another employee critical to the company’s success, that policy may also be tax-deductible. The general rule is that you can’t deduct payments from any policy you benefit from personally.
So while life insurance for self-employed workers isn’t always tax-deductible, it does have other long-term tax benefits. In most cases, life insurance payouts are tax-free, meaning your loved ones won’t have to deduct taxes from the lump sum death benefit they receive after you die.
Talk to a licensed tax advisor that specializes in business taxes about your situation, especially if your business is incorporated.
Term vs. whole life for the self-employed
When it comes to self-employed life insurance plans, you can choose between term and permanent life insurance policies. Term life is a budget-friendly option that lasts for a specific period of time, while permanent insurance, which includes whole life, lasts for a lifetime and comes with additional benefits.
Here’s a breakdown of both insurance types to help you determine your needs.
Term life insurance: Term life plans are designed to cover you for a set period of time, or term, usually ranging from 10 to 30 years. When you apply, you pick the term length and coverage amount that fits your unique situation. Term life is the most affordable type of life insurance, and your premiums stay the same for the length of the policy, making it easy to fit in your budget. That’s why this flexible coverage option is great for most families, especially if your income varies.
Whole life insurance: These policies last your lifetime and generally allow for higher coverage amounts than term life plans. They also build additional cash value over time that you can often borrow from or use as collateral on a loan. Depending on the type of policy you choose, payments can vary widely over time. Since they last a lifetime and come with a cash component, permanent plans tend to cost more than term life.
What’s the best type of life insurance for self-employed workers?
When it comes to self-employed insurance plans, you can choose between term and permanent life insurance policies. Term is much more affordable and a popular choice for most families, especially if your income varies and you’re watching your budget. But if you’re looking for protection that won’t expire to cover funeral costs or other lifelong financial needs, permanent life insurance can make sense.
How to buy life insurance when self-employed
There’s no magic amount of life insurance coverage that’s right for everyone. Rather, it comes down to how much you need to meet current needs and future financial goals. Calculating the right amount of life insurance coverage starts with your income, expenses, and assets.
Getting an accurate income estimate can be tricky when you’re self-employed, so here are a few tips:
- Get out your tax returns from the past three to five years and see how your annual income averages out.
- Track down 1099s from your most recent tax year to calculate your income.
- Check bank statements, invoice receipts, or your accounting software to get a monthly or quarterly breakdown of all income sources.
The total doesn’t have to be exact, but it should be a good representation of what you generally earn each year.
Add up your current living expenses and any debts like a mortgage, credit card bills, or other loans. Being self-employed often also means paying for more essentials yourself, like medical insurance and retirement plans. Make sure you include those when tallying up your expenses. It’s also smart to consider any cash sources or assets you have, like savings accounts or investments to help cover those needs.
Finally, think about future financial goals and expenses. If you have dependents, consider long-term costs like college tuition or caring for elderly parents. Life insurance payouts are designed to help your family replace your income if you die unexpectedly. They can also help keep your business afloat after you’re gone, so factor those potential needs into your coverage total.
But remember, the “right amount” is completely unique to you. Check out our term life insurance calculator to figure out a good amount of coverage for you and your family.
Still have questions or want more information about life insurance?
That’s what we’re here for. eFinancial works with top-rated insurance companies to help you find the right coverage for you and your family. Call us or start your quote online today.
At eFinancial, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed and updated regularly to ensure the information is as relevant as possible.