Life Insurance

Life Insurance for Self-Employed & Freelancers

Jan 31, 2022
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Life insurance is an important financial planning tool for anyone, but for the self-employed it's an especially critical layer of financial security. Whether you’re an independent contractor who operates as a solopreneur or a small business owner with a few employees on board, it’s important to shop around for the best life insurance for self-employed individuals.

In addition to choosing the right amount of coverage to protect both your family and your business, you should also determine the best type of policy to meet your needs. Here is everything you need to know about picking a life insurance policy for self-employed contractors or business owners.

How to get life insurance for self-employed individuals

Understanding life insurance basics is a must before you start shopping for policies. Here’s how it works:

  • You choose a plan that offers a death benefit to your beneficiary when you pass away. 
  • You pay a premium (which could be monthly or annually) in exchange for this coverage. 

A term life policy stays in effect for a set number of years, while a permanent (aka whole life) policy lasts your entire life as long as you keep up with your premium payments. Term life is usually less expensive since the coverage period is limited, and thus, less risk for the insurer during a term life policy. A permanent life insurance policy is guaranteed to offer a payout of the benefit, but costs more.

There are several different criteria that impact your quote, including your age, health, smoking status, and coverage amount. Some companies require a medical exam; however, Ethos skips this step in favor of an online questionnaire. You’ll answer a few questions on your health history, whether or not you smoke, and your finances. 

When you’re self-employed, it’s important to accurately estimate your income in order to get enough coverage. It’s also crucial to be honest with your answers. If you lie on your life insurance application, your beneficiary’s claim could be denied once you pass away, with none of your premium payments refunded.

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The traditional paper process can take weeks, even months. Ethos speeds up this process, saving you time and money.

How much of a life insurance policy for self-employed do you need?

Calculating your self-employment life insurance coverage is more complicated when compared to a salaried employee. When you have a set salary, it’s easy to estimate what type of income you want to replace for your family. But there are several other considerations to account for when you’re self-employed.

First, consider your short-term and mid-term earning potential. A life insurance policy is a long-term commitment, so don’t limit your coverage amount if you anticipate growing your income in the coming years. Many experts often recommend multiplying your income by 10 to determine your coverage. When you’re self-employed, you may want to be more generous with that multiplier.  

Another strategy for calculating your coverage is to add up these four categories:

  • Debt: Self-employed individuals should include both personal and business debt.
  • Income: Think about how long you would want your beneficiary to have money to cover your lost income.
  • Mortgage: Many people like to leave enough behind to pay off their mortgage so there’s no financial pressure for their families to move.
  • Education: If you have younger children, you could also account for paying some or all of their college education with your life insurance policy. 

This approach is commonly called the DIME method, based on an acronym of the four factors you're adding together.

Is life insurance tax deductible for self-employed people?

Most business-related expenses are tax deductible, which lowers your taxable income and ultimately saves you money. This is especially helpful when you’re self-employed because you pay both income tax as well as self-employment tax that covers your Social Security and Medicare contributions. Business-related subscriptions, supplies, marketing costs, and even health insurance all count as tax deductions. 

Unfortunately, however, you typically can’t deduct life insurance premiums when self-employed. 

The exception is if you offer life insurance as an employee benefit as part of your business. Your company would need to be classified as either an LLC or S corp, which disqualifies sole proprietors from this strategy. In this instance, all eligible employees would be in a group policy. But businesses can only deduct $50,000 in premiums each year. 

The good news is that while the life insurance premium isn’t deductible for most self-employed individuals, the death benefit is typically tax-free for your beneficiary. That means they receive the full amount and don’t have to pay state or federal income tax on these funds. That’s one of the reasons why so many people choose life insurance as part of their estate planning strategy.

Bottom line on self-employed life insurance

Getting online life insurance when you’re self-employed is not too different than when you’re an employee. As long as you calculate an appropriate amount of coverage, the process is quick and easy. And while you can’t use your premiums as a tax deduction, you can rest easy knowing that your beneficiary will have a tax-free inheritance if you do pass away during your term.

The information and content provided herein is for informational purposes only, and it is not to be considered legal, tax, investment, or financial advice, recommendation, or endorsement. You should consult with an attorney or other professional to determine what may be best for your individual needs.

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