There is an element of risk for anyone who is self-employed, both professionally and financially. Your name and bank account are out on a limb every day. Like many solopreneurs, you might have adopted the philosophy of, “The greater the risk, the greater the reward.”
But have you considered that other people are sitting out on that limb with you every day? It might be the banker who provided the loan to help get your business off the ground, the company you’re making payments to for all of the technology or tools you use, and the people who are at greatest risk — your family.
If you work for yourself, you’ve had to carefully consider and select your vehicle insurance, property and casualty insurance, and health insurance if your spouse doesn’t have it through their employer. You bought this insurance to control how much financial damage would be done if the unexpected happened to you — a car accident you caused, storm damage to your office/home office, or an appendix that burst, causing the need for emergency surgery.
But, what about life insurance? You’re still relatively young and healthy, you don’t have time to be sick, and your car insurance has some medical coverage. Can’t it just wait a few more years?
This is where risk and reward re-enter the picture.
Why the self-employed need life insurance
People depend on you. Your family and the people who rely on you and your business for their survival need a financial safety net if you pass away. Life insurance provides that safety net.
A few business reasons you need life insurance:
- You want your business to continue without you
- You have debt or real estate connected to your business that you don’t want your family to become responsible for
- You have to fund a buy-sell agreement to help someone buy your business, perhaps a beneficiary or a partner
People depend on you and your business. Life insurance can keep it in the family if you’d like or replace your income if the company won’t operate any longer without you.
Some personal reasons you need life insurance:
- You have business loans backed by personal assets, like your home, that you don’t want your family to lose
- Your family will quickly have to sell the business because they aren’t equipped to run it
- To provide income to your family while they learn the business because they know how important it was to you
Types of life insurance for the self-employed
If you’ve decided that having life insurance makes sense to you as someone who is self-employed, how much you need and what you can afford will determine the type of life insurance you purchase.
There are two types of life insurance you have to choose from:
Term life insurance for the self-employed
If affordability has kept you from buying life insurance, term insurance is your best bet. You’ll get more coverage for less money with term life, and it will expire later in your life when you no longer need life insurance.
Level-term life is the most common type of term life insurance because the premiums won’t fluctuate on you, and income for the self-employed can be unpredictable.
Depending on your age, health, gender, and profession, term life can be very affordable. A $1 million term life policy for a 30-year-old will cost $50-$70 per month, whereas a permanent plan with the same death benefit for the same person will cost about 10 times that amount.
You’ll also have to select the period of time (the “term”) that you want your policy to stay in force. If you’ve taken out business loans and have employees, you’ll want to at least pick a term that is the same length of time as your loan payments (5, 10, 20, or 30 years).
Permanent life insurance for the self-employed
As shown in the example above, permanent life insurance is much more expensive than term life insurance. The main reason for that is the permanent policy not only has a death benefit that will be paid to your beneficiaries, it also has a savings (“cash value”) component that builds over time.
One benefit of owning a permanent life insurance policy is that the cash value can be borrowed, which would come in handy to help you pay for an opportunity or challenge you encounter with your business. Unfortunately, it can take 15-20 years for a policy to accumulate enough cash to make it worth borrowing.
Some self-employed individuals will let the cash value grow without ever borrowing any of it. They use the cash value in their golden years to supplement their income from Social Security and any retirement plans they may have.
Most financial advisors advise their self-employed clients to keep their expenses down by buying term insurance and investing any money they saved back into their business or a retirement plan.
Is life insurance tax-deductible for the self-employed?
Unlike health insurance premiums that are usually deductible, life insurance premiums are not tax-deductible. However, there is one exception: if you own your own business and offer life insurance as an employee benefit. You can be a sole proprietor, LLC, or have a subchapter “S” corporation to deduct premiums for your employees.
Now that you’ve decided that you need life insurance and you’ve picked the type that’s best for you and your situation, you’ll need to find and apply for a policy. There are many online and offline resources to provide you with quotes from top-rated companies. But beware — many life insurance agents will push you towards the higher-commission paying whole life insurance, which is why they say, “Whole life insurance is sold, term life insurance is bought.”
Beyond shopping for life insurance, as someone who’s self-employed, don’t forget to get a long-term disability insurance policy to protect your income if you’re sick or injured and can’t work. And, as part of your private benefits package, include a retirement plan so you can enjoy your sunset years in comfort. You will have earned it.
Having grown up in upstate New York, Bob Phillips spent over 15 years in the financial services world and has been making freelance writing contributions to blogs and websites since 2007. He resides in North Texas with his wife and Doberman puppy.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.
