Life Insurance for Self-Employed – What Do You Need?

When you venture into self-employment, whether as a freelancer, gig worker, or small business owner, the creative freedom often outweighs the financial stability of working for someone else. However, when you leave the protection of your employer’s benefits, you can replace them, whether in health insurance, dental coverage, or retirement plans.

It is often top of mind to secure medical coverage and save for retirement as you transition to self-employment. Still, it can be not easy to find an individual life insurance policy. According to the LIMRA 2022 Life Insurance Barometer study, 23 percent of respondents only have life insurance coverage at their workplace. When workers leave their full-time jobs to become self-employed, nearly a quarter could lose financial security for their families.

You can buy self-employed life insurance to ensure your loved ones are taken care of if something goes wrong. But where do you begin? Our team will help you understand why you need life insurance as an independent worker, how to buy life insurance with a flexible income, and what plan is right for you.

What is self-employed life insurance?

A self-employed life insurance policy is something an individual purchases on their own, without sponsorship from their employer. It is similar to what anyone would purchase to supplement their employer’s plan. Self-employed individuals may be unable to obtain group life insurance, which is usually free for them and does not require a medical exam. However, coverage is limited.

Should Self-Employed People Buy Life Insurance?

A self-employed individual faces unique challenges compared to traditional employees, particularly regarding life insurance benefits. Self-employed people may want to consider purchasing an individual life insurance policy, as they do not have the cushion of employer-provided life insurance as they do in traditional employment.

The security of a life insurance policy provides a significant financial safety net for your family, ensuring they are financially supported in the event of your untimely passing.

Top Picks for Best Life Insurance for Self-Employed Individuals

Ethos Life Insurance for Self-Employed

With Ethos, you can find coverage from multiple insurance companies without taking a medical exam, even for fully underwritten policies. With a fully online application process, it promises faster coverage than applying directly to most insurance companies, even most of them – which could benefit busy entrepreneurs.

The eligibility age for fully underwritten term life policies ranges from 20 to 65, and coverage can reach $2 million for people under 50.

Ethos offers guaranteed issue whole-life insurance to people 65 to 85 and people in poor health.

New York Life Insurance

The New York Life Insurance Company offers whole life insurance and an extensive array of optional riders. As a mutual insurer, the company also pays its policyholders dividends every year based on its financial success, which can enhance the growth of its permanent policies in cash value.

New York Life offers the option to purchase a term plan initially and convert it to a whole plan later if your insurance needs to change. Another benefit is the highest financial strength rating from AM Best.

However, New York Life’s purchasing process is more modern than other companies on this list. You’ll need to talk with an agent, and you need an online quote.

Ladder Life Insurance

With Ladder’s flexible coverage, freelancers can change their coverage as their incomes fluctuate. Self-employed individuals on a tight budget will appreciate the $5 monthly premium, which can be canceled anytime.

You can save time to get a policy. A simple 3-step application will cover up to $3 million, which can be increased to $8 million by undergoing a full underwriting process.

Insurers for young people; applicants at most 60 accepted. Limited offerings. Ladder policies are term-only, with no whole life or universal policies and no riders.

Nationwide Life Insurance

The Nationwide booth offers unparalleled customer service and features tailored to meet the needs of small business owners. These include a buy/sell agreement allowing your partner to receive your death benefit and key person insurance covering the business’s financial loss after you pass away.

JD Power’s 2023 survey of life insurance customer satisfaction places Nationwide in a strong position, scoring 50 points above the average and only being edged out by State Farm. Additionally, it is a relatively rare insurer that allows bundling discounts for life insurance and other types of coverage, such as business insurance, home insurance, pet insurance, and auto insurance.

Term life policies are limited to applicants under 70, and Nationwide requires a medical exam for most plans. Online quotes are only available for term policies.

State Farm Life Insurance

Insurer State Farm provides three types of universal life insurance, including joint policies for self-employed couples.

State Farm offers bundling discounts with its life insurance and business insurance policies, just like Nationwide. There are three types of universal life insurance offered by State Farm: standard universal, survivorship universal, and joint universal.

Your partner might be self-employed, or you’re the primary income earner, so you should look into State Farm’s universal life insurance. Invest in business expenses or support retirement with this policy, which builds tax-deferred cash value, which either policyholder can access.

How Does Life Insurance Work For the Self-Employed?

You can buy life insurance for independent contractors and self-employed people like any other person. A beneficiary, whether a family member, friend, or business partner, receives your coverage amount. This money will cover your funeral costs and support your family.

Eventually, permanent life insurance plans accumulate cash value that can be used to pay for a child’s education, a business expense, or to supplement retirement savings. Self-employed people without employer-sponsored retirement plans can benefit from this benefit.

How We Chose the Best Life Insurance for Self-Employed Individuals

We looked for a few crucial features to narrow down the best life insurance companies for self-employed individuals. Those features included:

Accessibility: Customers need to be able to apply online or have positive reviews for insurance companies’ application processes.

Financial strength: An insurance company with a high financial strength rating is less likely to fail to pay benefits when you need them.

High customer satisfaction ratings: Compare the ratings of insurance companies on sites like the Better Business Bureau and JD Power surveys.

Policy options: Term life insurance is a popular option among the companies on this list, though those plans are affordable and customizable.

Affordability: While life insurance premiums differ for each individual, we emphasized companies with affordable premiums.

How to Get Life Insurance If You’re Self-Employed

There are different ways to purchase insurance policies depending on your chosen company. Some policies require medical exams. Others can be purchased online.

Here are some things you should keep in mind when you are looking for life insurance.

Decide How Much Life Insurance Coverage You Need

Your exact coverage amount and premium will depend on several factors; however, a higher amount of coverage equals a higher monthly cost. Therefore, your coverage needs must be balanced with your monthly budget.

Here are a few questions to ask yourself:

• Financially, how many people are dependent on you?
• What happens if you pass away and your business continues to run?
• Have you made arrangements for your funeral, and how much will they cost?
• How much can you afford to spend each month on life insurance?

Choosing the right insurance plan requires defining your budget and coverage needs before you work with an insurance agent.

Research Types of Life Insurance Available to Self-Employed Professionals

It is important to explore your options, whether you want term, whole, or universal life insurance. If you have a spouse or business partner, conjoint policies may be a good option.

You can compare term and whole life insurance by remembering that term policies cost less, but whole life policies offer fixed premiums and tax-deferred cash value. Term policyholders can convert to permanent life insurance without buying a new one.

Gather Documentation to Prove Your Income

For life insurance companies, proving your income will be necessary — so they can assess whether the death benefit is appropriate. The disclosure may be hard for some self-employed individuals. Prepare your application like you’re filing your taxes. Gather your bank statements, pay stubs, and tax documents to prove your total income.

Seek Guidance From a Licensed Life Insurance Agent or Broker

Talk to an insurance agent, online or off, if you need clarification on what kind of policy you need or how much coverage you need. Many insurance companies employ agents nationwide so that you can chat with someone in person or online.

Compare insurance premiums and policies from multiple carriers with an insurance broker like Policygenius.

You can purchase a plan directly through your insurance company or a broker, saving you time and potentially money by not meeting with multiple agents.

Complete the Application Process

Life insurance applications can be tedious – why do they need so much information?

Your coverage eligibility depends on several factors, including your age, health, family history, lifestyle, and others. You need to provide as much information as possible to get an accurate quote, even though it seems like a lot of time and data disclosed.

Some insurers offer quick quotes based on limited information. These are usually available online in minutes. Final quotes may require more documentation and underwriting.

Undergo A Medical Exam If Required

Insurance companies may require a medical exam as part of their underwriting process. Medical exams provide insurers with a detailed picture of your health, including your risk factors for heart disease and diabetes. These procedures are completely private, and your insurer covers the cost.

Exams may include questionnaires and non-invasive physical examinations. Look for insurers that offer no-exam coverage if you don’t want to undergo a medical exam. (Be aware, however, that the death benefit and premiums you qualify for without an exam may be less appealing.)

Factors Affecting Life Insurance Costs

When calculating life insurance premiums, insurance companies consider various factors, such as health, lifestyle choices, and policy type.

Term Length: The duration of the policy term can influence life insurance premiums. In general, longer terms are more expensive than term policies because the death risk increases with time.

Coverage Amount: Your coverage amount directly impacts your premiums. The higher the death benefit, which is the money paid out when you pass away, the higher the premium.

Smoking Status: Health risks associated with tobacco use result in smokers paying higher premiums than non-smokers because of the higher risk they pose to insurers.

Overall Health: Your overall health heavily influences life insurance premiums. Chronic or severe health conditions can result in higher premiums, while a clean bill of health can decrease premiums.

Lifestyle: For instance, skydiving or racing cars have a high risk associated with them. You may face higher premiums if you participate in such activities.

Family Medical History: Your premiums may also be affected by your family’s history of certain medical conditions, such as cancer or heart disease.

Type of Life Insurance for Self-Employed 

Your family might experience financial difficulties if something happened to you and your income was lost. There are three types of life insurance to consider.

Term Life Insurance

The term life insurance policy covers your family for a certain time and pays out a payout if you die. There’s no better value than whole life or other types of cash-value insurance. It’s the only choice!

Insurers tend to think you’ll always need life insurance. You won’t. We’ll cover that shortly. If you plan wisely, dump debt, and build wealth, you won’t always need life insurance.

Whole Life Insurance

Until you pay your premiums, whole life insurance covers you for life. The primary benefit of whole life insurance is the death benefit, but you can borrow or withdraw it against it. However, doing so could reduce the benefit or cause the policy to lapse.

Universal Life Insurance

With universal life insurance, you’re covered for life as long as you pay your premiums. When you first open the policy, your payments build up cash value. Adjust the amount you pay yearly; the cash value will help you pay your premiums as you age. The conditions may be similar to borrowing cash value from a whole life policy. However, surrender charges may apply.

Life Insurance for The Self-Employed – 4 Things to Know

Being self-employed comes with the advantage of being your boss and creating a job you love. It’s a common reason people hesitate to go self-employed. Group life insurance is one of the benefits typically offered and missed. However, can you obtain life insurance as a self-employed individual? Life insurance can be purchased at an affordable price if you keep a few things in mind.

Calculate Your Income

Calculating your income before meeting with an insurance agent to determine how much life insurance you need is important. Review your financial statements to see how much you earned last year.

Buy 10-15 Times Your Income

Life insurance typically costs about ten times your income but may need to be purchased to cover any outstanding debts, such as student loans or mortgages. Even though 10 times an individual’s income is the average, life insurance can cost up to 30 times.

Consider Term Life Insurance

A term life policy is the best bang for your buck for self-employed individuals. Term life insurance provides affordable coverage for a limited time and lets you reassess your life insurance needs as time goes by. Your policy may be retained, converted to a permanent policy, or withdrawn if no longer needed.

Life Insurance Isn’t Tax Deductible

Life insurance is not deductible. However, a self-employed life insurance deductible may apply if your business offers group life insurance as an employee benefit. Generally, this does not apply to most newly self-employed businesses, but it is a good idea to keep in mind in the future.

Is life insurance tax deductible for self-employed people?

Tax deductions lower your taxable income and save you money when you have business expenses. If you work for yourself, this is especially helpful since you pay both income and self-employment taxes. Deducting your business’s subscriptions, supplies, marketing costs, and even health insurance is possible. 

However, self-employed people cannot generally deduct life insurance premiums. 

It is an exception for businesses that offer life insurance as employee benefits. This strategy applies to LLCs and S corporations, which exclude sole proprietors. It would be a group policy for all employees in this case. A business can only deduct $50,000 annually in premiums. 

Life insurance premiums for self-employed individuals are not deductible, but your beneficiaries usually receive tax-free death benefits. As a result, they receive the full amount without paying state or federal income taxes. That’s why so many people use life insurance for their estate planning.

Frequently Asked Questions

What Type of Life Insurance Do You Need if You’re Self-Employed?

Self-employed should consider term life insurance. It’s more affordable than other types of insurance, and you can cancel it anytime. 

A coverage amount of 10 to 15 times your annual salary is recommended.

Do Side Hustlers Need Private Life Insurance?

A side hustle and a full-time job don’t mean you don’t need a private life insurance policy. Group life insurance through your day job is likely insufficient for your needs.

Can Life Insurance Premiums Be Considered Business Expenses?

Generally, the cost of life insurance premiums cannot be deducted from your taxes, but there are exceptions (with limitations) for business owners who offer life insurance to their employees.

How Should Flexible Workers Calculate Their Income?

Self-employed individuals must add up their income sources to determine how much life insurance they need. You can use your previous year’s tax return to verify your annual income. Other documentation, such as bank statements, can also be used to show your expected income for the current year.

How Much Life Insurance Do I Need As a Self-Employed Individual?

Life insurance should offer enough coverage to maintain your dependents after your death, regardless of your employment status. Some experts recommend 10 times your annual salary.

How Much is Life Insurance For Self-Employed Workers?

A healthy 30-year-old in the US pays around $400 per year for life insurance, depending on their coverage amount and other factors.

Is Life Insurance Tax Deductible For Self-Employed Individuals?

Generally, life insurance is not tax deductible for self-employed people. But if you have permanent life insurance, you can grow tax-deferred cash value that you can tap into anytime.